Pragmatic Deportment under Non-Stationarity to Ascertain Vigorous Drivers of Inflation

Abstract

Inflation is one of the root causes of major economic problems in Pakistan. The report's focal purpose is to contribute to the literature of the evaluation of inflation flux root causes in small open Pakistan’s economy structure. The whole set up relies on three statistical practices i.e., DSGE method, VAR Cointegration and VECM Model to ascertain the main determinants of inflation rate empirically. The DSGE model extracted from VAR finite-order representation which follow each of the five non-stationary exogenous state variables to explain the endogenous variable. This research work has incorporated variables such as: inflation rate, joblessness rate, currency quantity growth proportion, interest rate, labor output growing frequency and the output gap in Pakistan. The time series data from 1980 to 2018 is used. This manuscript provides well-rounded evidences for the existence of short-run & long-run co-movements between inflation rate and its regressors in a concise way. Findings suggest that revolution of financial policies is crucial to achieve price stability.