Exploring the Nexus Between Interest Rates and Poverty in Pakistan: A Macroeconomic Analysis of Transmission Channels and Policy Implications

Abstract

Poverty remains a persistent challenge in Pakistan, undermining sustainable economic development and social welfare. Understanding the macroeconomic determinants of poverty is crucial for effective policy formulation. This study aims to examine the impact of interest rate fluctuations on poverty levels in Pakistan over the period 1980–2024. Using the Autoregressive Distributed Lag (ARDL) bounds testing approach, the analysis explores both the short-run dynamics and long-run relationship between interest rates and poverty. The results reveal a significant and positive long-run relationship, between selected variables, indicating that higher interest rates exacerbate poverty. Short-run results show mixed effects of interest rate changes on poverty, reflecting complex transmission mechanisms. The study underscores the critical role of interest rate policy in influencing poverty outcomes and highlights the importance of aligning monetary policy with inclusive growth objectives. These findings offer important insights for policymakers to design strategies that mitigate the adverse effects of interest rate fluctuations on vulnerable populations.

Keywords: Interest Rate, Poverty, Pakistan, ARDL, Cointegration, Error Correction Model