The Economic Consequences of Political Instability: Insights from the Economy of Pakistan

Inflation is a persistent economic challenge for Pakistan, deeply intertwined with the country's political instability. This research examines the influence of political instability on inflation, recognizing it as a crucial factor that undermines the effectiveness of economic policies and worsens macroeconomic imbalances. This study analyses the impact of various political factors, besides others, on inflation in Pakistan using data collected annually from 1981 to 2021, utilizing the ARDL bounds testing method. Inflation is the dependent variable whereas oil prices, GDP growth, domestic loans to the private sector, political factors, and political instability are independent variables. The findings imply that over the long run, while economic growth has a negative correlation with inflation, the quantity of credit extended to the private sector has a positive and significant correlation with inflation. On the other hand, both in the short- and long-term, inflation and oil prices have a significant and positive relationship.