Analyzing the Nexus Between Economic Development and Money Monetization: Evidence from Pakistan

Abstract

The study explores the intricate relationship between economic development and money monetization in the context of Pakistan, drawing on insights from endogenous growth theory. By empirically developing models based on standard gross domestic product (GDP) frameworks, the research aims to shed light on the long-term dynamics between these two crucial factors. Using the error correction model approach and co-integration analysis, the study delves into the relationship between money supply and economic development, considering variables such as inflation, income gap, investment, and money supply. The co-integration results indicate a stable equilibrium relationship among the variables over the long term, suggesting a sustained connection between money monetization and economic growth. Furthermore, the error correction results reveal the presence of a dependent relationship between economic growth and the identified independent variables, highlighting the significance of factors such as inflation, income disparity, and investment in shaping economic development.  To validate the long-term equilibrium relationship between these variables, the study employs the auto-regressive distributive lag bound testing approach, providing insights into the stability and sustainability of the observed dynamics. Additionally, the research examines the short-term relationship between economic growth and money monetization, offering valuable insights into the immediate impacts and dynamics. This study contributes to the understanding of the complex interplay between economic development and money monetization in Pakistan, offering empirical evidence and analytical frameworks to inform policy decisions and strategic interventions aimed at fostering sustainable economic growth.