Trade Openness and Economic Growth: Estimating the Inflation Threshold for Pakistan’s Economy




inflation and growth, trade openness, economic growth, threshold level of inflation


Objective: This paper examines inflation and growth: revisiting the estimation of the threshold level of inflation for Pakistan.

Research Design & Methods: The study uses time series data from 1985 to 2015. It employs the Generalized Least Square (GLS) and Conditional Least Square (CLS) methods with the aim of determining the impact of trade openness on economic growth and estimating the threshold level of inflation for the economy of Pakistan.

Findings: The findings of the study revealed that there is a significant positive impact of trade openness on economic growth because the coefficient of trade openness improved from 4.26 before trade liberalization to 4.98 after trade liberalization. Secondly, the threshold level of inflation was estimated at 7% for the Pakistan economy.

Implications / Recommendations: The study therefore recommends, among others, that Pakistan should liberalize its economy through a decrease in taxes on international trade as a percentage of tax revenue. Secondly, policymakers and the state bank should try to keep inflation below or at 7% for the good health of the economy.

Contribution: It was observed that trade openness had a significant impact on the economic growth of Pakistan (R (2; 11) = 4.98, p < 0.05) accounting for 77.6% of its variance (Adj. R2 = 0.776). Invariably, trade openness significantly contributed to Pakistan’s economic growth between 2002 and 2015. However, it is evident that after trade liberalization the coefficient of trade openness significantly improved from 4.26 between 1987 and 2001 to 4.98 between 2002 and 2015. This implies that trade liberalization significantly and positively affects economic growth in Pakistan (p < 0.05). The analysis to assess the impact of trade openness on economic growth was carried out using data before and after the structural break between 2001 and 2015 to capture whether trade liberalization could affect economic growth differently before and after liberalization. The study found that trade openness had a significant positive impact on economic growth because the coefficient of trade openness improved from 4.26 before trade liberalization to 4.98 after trade liberalization. Secondly, the Khan and Senhadji model (2001)  for estimating the threshold level of inflation for developed and developing countries was adopted to estimate the threshold level of inflation for the Pakistan economy. The study revealed a threshold level of 7% for the Pakistan economy.


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