Capacity does not expand there is a danger of rapid

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capacity does not expand, there is a danger of rapid increase in general price level in the long run without any additional growth in the output. This phase of rising inflation can have severe consequences for the economy. High inflation is always correlated with increased price variability, which can lead to uncertainty about the future profitability of investment projects. This leads to more conservative investment decisions than would otherwise be the case. It will, ultimately, leads to lower levels of investment and economic growth. Inflation may also impact an economy’s balance of payments by making its exports relatively more costly. Moreover, inflation can interact with the tax system to disturb borrowing and lending decisions. Firms may have to allocate more resources to dealing with the effects of inflation. This study aims to consider these entire situations in the context of economy of Pakistan. It is to re-investigate inflation and growth relationship with the last 30 years’ data of the economy. The rest of the paper is arranged as follows: In section II, a brief review of earlier studies has been presented. Objectives of the study have been classified in section III. The structure and trends of inflation and growth in Pakistan have been discussed in section IV. Data and Methodology have been briefly mentioned in section V. Econometric specification of the model is presented in section VI. Section VII is reserved for results and discussions. Finally, the conclusion and policy recommendations are presented in section VIII. II. Review of Literature Various studies have been presented on the issue of inflation and growth. Most of this research work has been done internationally. We have critically reviewed some of theses important empirical studies to develop objectives in the context of Pakistan and, further, to analyze it to draw some important conclusions and policy recommendations. Barro (1995) examines the issue and finds a significant negative relationship between inflation and economic growth, considering variables like fertility rate, education, etc constant. The study contains a large sample data of more than 100 economies for the period 1960 to 1990 and to assess the effects of inflation on growth, a system of regression equations is used, in which many other determinants of growth are held constant. This framework is based on an expanded view of the neoclassical growth model as stated by Barro and Sala-i-Martin (1995). The study indicates that there exists a statistically significant negative relationship between inflation and economic growth. More specifically, an increase in the average annual inflation by 10 percentage points per year lowers the real GDP growth by 0.2 to 0.3 percentage points per year. Bruno and Easterly (1995) address the issue of inflation and growth and find no evidence of any consistent relationship between these variables up to a certain level of inflation. They assess that the growth falls sharply during discrete high inflation crisis, above than 40 percent, and recovers after inflation falls. Their empirical analysis shows
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