Asymmetric Effect of Public Debt on Inflation in Pakistan: A Time Series Analysis

Abstract

The present study has assessed the influence of public debt on yearly CPI inflation in Pakistan over the period 1983-2024, employing the NARDL approach of cointegration and error correction model. The model incorporates control factors such as money supply, real per capita growth, and trade openness. The research has also examined the asymmetric relationship between state debt and inflation in Pakistan. Both in the long term and short term, an increase in the public debt to GDP ratio has a positive and significant impact on inflation, while a drop in the public debt to GDP ratio is minimal. The results demonstrated evidence of an asymmetric influence in both the long term and the overall regression. Pakistan's debt-to-GDP ratio significantly exceeds the threshold for developing nations, resulting in almost two-thirds of tax revenue being allocated to debt servicing, so severely undermining macroeconomic stability in the country. The inflationary nature of rising debt necessitates that borrowing in Pakistan be restricted to economic purposes, hence avoiding superfluous fiscal expansion.

Keywords: Public Debt, CPI Inflation, Asymmetric, NARDL