Inflation, Income Inequality and Economic Growth in Pakistan: A Cointegration Analysis

The study is an attempt to explore the impact of inflation and income inequality in Pakistan. The study also analyzes the effect of foreign direct investment, workers’ remittances and manufacturing value added on growth. Annual time series data from 1972 to 2007 was used for the analysis. After finding all of the time series stationary at first difference, Johansen cointegration approach and vector error correction models are applied for the long run and short run analysis, respectively. The cointegration test results confirmed growth increasing impact of income inequality in Pakistan. Foreign direct investment, remittances and manufacturing valued added are found to have positives and significant impact on growth in Pakistan. The study also suggests some policy implications.