Political and Economic Uncertainty and Investment Behaviour in Pakistan

Ahsan Abbas, Eatzaz Ahmed, Fazal Husain

Abstract


This study analyses the effect of political stability and
macroeconomic uncertainty on aggregate investment behaviour in Pakistan
over the period 1960–2015. The Auto-Regressive Distributed Lags (ARDL)
methodology is applied to explore both the long-run equilibrium
relationship and short-run behaviour of investment. The macroeconomic
uncertainty variable is derived from real exchange rate and is computed
by the best-fitted GARCH model. The results reveal robust effects of
political stability and macroeconomic uncertainty on overall investment
activity in Pakistan. The government nationalisation policy, GDP growth,
user cost of capital, credit availability and degree of openness are
found to be the other key determining factors for investment both in
long- and short-run. However, the favourable impact of physical
infrastructure on investment holds in long-run only, while its effect is
adverse though insignificantly in short-run. The findings support the
neoclassical flexible accelerator principle and are consistent with
economic theory. The volume of available funds is the binding constraint
for investment and the McKinnon-Shaw hypothesis is validated in the
short-run. Keywords: Aggregate Investment, Irreversibility,
Macroeconomic Uncertainty, Political Stability, GARCH, ARDL, Bound
Testing Approach, Pakistan

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DOI: https://doi.org/10.30541/v58i3pp.307-331

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