Dynamic Properties of an Aggregate Econometric Model of Pakistan's Economy

Ather Maqsood Ahmed, Muhammad Rafiq, M. Shahid Iqbal

Abstract


The use of econometric models for policy planning and
decision-making is wide-spread in many developed as well as developing
countries. One of the most vexing problems of such an exercise is to
construct a model that could adequately reproduce the dynamic behaviour
of an economy. The recent experience in modelling has shown that policy
objectives could be achieved only by recognising the complex
relationship between real and monetary variables. Such an integrated
framework .could be used not only to compute impact and dynamic
multipliers and to determine the stability of the model, but also to
evaluate the relative importance offiscal and monetary policies. In the
present paper, this objective is achieved by constructing a linear yet
dynamic macro-econometric model of Pakistan's economy.' This model
although has a Keynesian structure, but it could easily and meaningfully
be solved to determine the values of endogenous variables especially
income in terms of pure exogenous variables. In order to establish the
dynamic stability of the model, we seek to present the "necessary
conditions" that will depend not only on the structure of the model, but
also on the estimated paramters of structural equations. After
establishing the stability of the model, the next step is policy
evaluation. In this regard the impact and the dynamic multipliers will
be computed. These multipliers will then be used to assess the relative
importance of fiscal and monetary policy variables on income and other
dependent variables such as consumption and investment. The time period
under consideration ranges between 1959-60 and 1987-88 which includes
dramatic events like two wars with India, nationalisation, the oil price
hike, recession and floods.

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DOI: https://doi.org/10.30541/v32i4IIpp.1031-1041

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