Exploring the Link between Globalization and Inflation: Evidence from Pakistan

Abstract

The world becomes a global village through the prompt exchange of products, human skills and knowledge, which are the main and wonderful aspects of globalization. A vast literature supports the contribution of globalization towards economic growth yet rising inflation in developing countries is also associated with increased globalization. Our study intends to explore whether this phenomenon is true in the case of Pakistan or not. This study employed different macroeconomic variables like globalization, exchange rate, government expenditures, and GDP as independent variables and inflation as dependent variables. Time series data from 1970 to 2020 has been used. We checked for the order of integration of the series and found mixed order of integration. Appropriate technique i.e., ARDL has been employed and the study reported empirical results for the short run and the long run. The findings of the study suggested that openness has an inflationary impact on Pakistan; an increase in globalization leads to high inflation in Pakistan. Pakistan needs to regulate fluctuations in the exchange rate. Besides, instead of current government expenditures, the public sector must promote development expenditures. Following the appropriate policy measures can bore the fruits of globalization well as reduce inflation in Pakistan like developed economies.