Journal of Finance and Economics. 2014, 2(4), 125-130DOI:
Abstract: The main purpose of this study was to investigate the inter-relationship among economic growth, savings and inflation and to estimate the threshold level of inflation for the economy of Pakistan. Annually time series data from 1973 to 2010 were used. Simultaneous equation model was used in the study. Three equations were used. 2SLS technique was applied for findings the results. OLS model was used for investigating the suitable rate of inflation for the economic growth. Inflation, economic growth and savings were endogenous variables while unemployment, foreign direct investment, depreciation rate, real interest rate, total debt servicing, indirect taxes, dependency ratio and total investment were exogenous variables. The results of 2SLS showed that inflation and real interest rate negatively and significantly affect the economic growth, whereas depreciation rate positively affect the economic growth. Economic growth, unemployment and real interest rate were negatively affecting the inflation rate, while indirect taxes had positive impact on inflation. The results also showed that economic growth, dependency ratio (% of working age population) and foreign direct investment were beneficial for enhancing the savings of a country, while depreciation rate is harmful for savings. It was also observed that there is no significant relationship between inflation and savings. The findings of OLS indicated that 9% rate of inflation was to leralable for the economic growth of Pakistan.