Exploring the Nexus between Economic Policy Uncertainty and Consumer Price Index in Emerging Economy: The Demonstration of ARDL and NARDL
Abstract
The global competitiveness and economic dynamics have caused volatility in many economic indicators especially in the uncertainty of government economic policies and regulations that effect the business and consumer decisions to greater extent. Investors and policymakers are constantly seeking to understand inflation dynamics and consider very important to know about the effects of such uncertainty on prices. This study aimed to spotlight the asymmetric impact of EPU on prices in Pakistan during period 2015 to 2022. We explored economic indicators, policy trends, and CPI sourced from the Pakistan Bureau Statistics. We applied ARDL and NARDL techniques to test the established hypothesis and achieve the study aims. Our findings confirmed that policy uncertainty has significant negative effect on Pakistani households. Further our findings also validated and confirmed the short and long-run asymmetric relationship between EPU and CPI in the context of Pakistan. Whilst spending, investment, and currency exchange rates are all factors that have connections to inflation thereby concluding that different government regulations and policies might affect these factors. Therefore, it is a serious issue that affects the country's economic dynamics and patterns directly, so the government needs a well-established workable framework to counter the element of uncertainty with a view to avoid price surge and economic imbalances. We also noticed that political instability and corruption have far reaching consequences for the economic growth of Pakistan. The study has implications for policymakers who are searching for way forward and new ways to reduce inflation and to remove the economic imbalances to ascertain smooth functioning of the economy. Further by understanding the relationships between policy uncertainty and the CPI, policymakers can build a growth-friendly environment with less negative effects on consumer prices.
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