The different diagnostics tests are used: to investigate the autocorrelation, the Breusch-Godfery Langrage Multiplier (LM) test is applied and the results have suggested that there is no autocorrelation. The model has passed through the stability test. The cumulative sum of recursive residuals (CUSUM) and the cumulative sum of squares of recursive residuals (CUSUMSQ) are used as the last stage of ARDL estimation to checkthat all coefficients in ECM model are stable and applicable for an effective policy analysis.6. RecommendationsFirst, the negatively high coefficient of inflation has suggested the policy makers to reconsider about the existing macro-economic policy. The first priority of them are to control the inflation by introducing “Inflation First” policy because high and persistent inflation is consider as imposition of regressive tax on the poor people and adversely impact on the economic development. Secondly, In case of the developingcountries, a lot of issue faced by the government, like: utilization and the miss-allocation of resources. If the government expenditures are utilized in the excess amount, the excessive capital (productive) expenditures become unproductive at the margin.ReferencesAsteriou, D., Hall, S. H., 2007. Applied Econometrics (1st ed).New York: PalgraveMacMillan.Atesoglu, H. S., 1998. Inflation and real income, Journal of Post Keynesian Economics 20, p. 487.Barro, R. J., 1995. Inflation and economic growth, Bank of England Quarterly Bulletin, p. 166.Breusch, T., 1978. Testing for autocorrelation in dynamic linear models, Australian Economic Papers 17, p. 334.Bruno, M & Easterly, W., 1998. Inflation crises and long run growth, Journal of Monetary Economics 41, 3.Devarajan, S., Swaroop, V., Zou, H., 1996. The composition of the public expenditure and economic growth, Journal of MonetaryEconomics 37, 313.De Gregorio, J., 1992. The effects of inflation on economic growth: lessons from Latin America, European Economic Review 36, p. 417.Dickey, D. A., Fuller, W. A., 1979. Distribution of estimators for autoregressive time series with a unit root, Journal of AmericanStatistical Association 74, p. 427.Enders, W., 2004. Applied Econometric Time Series (2nd ed). New York: John Wiley and Sons.Ericsson, N. R., Irons, J. S., Tryon, R. W., 2001. Output and inflation in the long run, Journal of Applied Econometrics 16, p. 241.Fischer, S., 1993. The role of macro-economic facts in growth, Journal of Monetary Economics 32, p. 482.Godfrey, L. G., 1968. Testing for higher order serial correlation in regression equation when the regressions contain lagged dependentvariables, Econometrica 46, p. 1303.Granger, C. W. J., 1969. Investigating causal relations by econometric models and cross spectral methods, Econometrica 7, p. 424.Guerrero, F., 2006. Does inflation cause poor long-term growth performance?, Japan and World Economy 18, p. 72.Johansen, S., 1995. Likelihood-based interface in Conitegrated Vector Auto Regressive models. Oxford: Oxford University Press.Landau, D. L., 1983. Government expenditure and economic growth: a cross-country study, Southern Economic Journal 49, p. 783.Landau, D. L., 1985. Government expenditure and economic growth in the developed countries: 1952-76, Public Choice 47, 459.Loizidies, J., Vamvoukas, G., 2005. Government expenditure and economic growth: evidence from trivariate causality testing, Journal ofApplied Econometrics 8, p. 125.Mallik, G., Chowdhury, A., 2002. Inflation, government expenditure and real income in the long run, Journal of Economic Studies 29, p.240.Pesaran, M. H., Shin, Y., 1999. An autoregressive distributed lag modeling approach to cointegration analysis. In: Storm, S. (Ed.),Econometrics and Economic Theory in 20th Century: The Ranger Frisch Centennial Symposium. Cambridge University Press,Cambridge Chapter 11.Pesaran, M. H., Shin, Y., Smith, R. J., 2001. Bound testing approaches to the analysis of level relationships, Journal of AppliedEconometrics 16, p. 289.Phillips, P., Perron, P., 1988. Testing for a unit root in time series regression with I(1) processes, Biometrika 75, p. 335.State Bank of Pakistan, 2010 Hand book of statistics of economy of Pakistan. Retrieved May 05, 2011, from SBP web site via access:http://www.sbp.org.pkThornton, D. L., 1996. The
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