Linkages between inflation, economic growth and terrorism in Pakistan

This paper investigates the linkages between inflation, economic growth and terrorism using annual frequency data over the period of 1971-2010, the maximum time period for which consistent data is available for Pakistan. The ARDL bounds testing approach to cointegration has been applied while robustness of long run relationship is established by using rolling window approach. The empirical evidence confirms the cointegration between inflation, economic growth and terrorism in Pakistan. An increase in inflation raises terrorist attacks while economic growth is also a major contributor to terrorism. Moreover, bidirectional causality is found between inflation and terrorism as investigated by the VECM Granger-causality approach while variance decomposition approach also supports the findings by the VECM Granger causality analysis. Our results therefore points to benefits of pursuing sustainability of low inflation in reducing terrorism. However, it also implies some difficulties for policy-makers in Pakistan in their pursuit for economic growth as latter would result in an increase in terrorism activities crowding out some of the benefits of economic growth.