The Pakistan Development Review
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New Keynesian Macroeconomic Model and Monetary Policy in Pakistan
Get PDFThe New Keynesian (NK) models have advantage over the Real
Business Cycle (RBC) models as they allow rigidities in the structure of
the model, hence provide built-in mechanism to incorporate the
structural shocks. The estimation of the NK model for Pakistan’s economy
remains a relatively unexplored area. This study attempts to estimate a
closed economy version of the NK model using robust econometric
technique. On the empirical side macroeconomic dynamics have been
investigated in response to unanticipated monetary shock. The reaction
of the monetary authority (the State Bank of Pakistan) in response to
structural shocks has been assessed by exploring the role of forward
looking expectations. The SVAR model has been employed to estimate the
structural parameters. The response of macroeconomic aggregates to
structural shocks has also been simulated along with discussing the
forecast error variance decomposition. The role of forward looking
expectations is found to play prominent role in the prevailing market
structure of the country. The State Bank of Pakistan (SBP) has been
found to respond to shocks after a lag of one or more periods indicating
time inconsistency problem which is due to discretionary monetary policy
stance being adopted by the monetary authority. The distorted beliefs of
economic agents about the stance of monetary policy have pointed towards
weak effectiveness of the monetary policy. The results suggest that the
SBP would have to adopt an independent and transparent monetary policy
by following some sort of Taylor-type rule. JEL Classification: C32,
C51, E52, E58 Keywords: New Keynesian Models, Real Business Cycle
Models, Forward Looking Expectations, SVAR Model, Price
Puzzl
Income Inequality, Redistribution of Income and Trade Openness
Get PDFLiterature on nexus between trade openness and government
spending is impressive [Atif, et al. (2012), Rudra (2004), Dani (1997)
and McGuire (1999)]. The literature is growing rapidly. Analysts have
documented the positive effects of government social spending [see for
example Mesa-Lago (1994); Huber (1996); Weyland (1996); McGuire (1999)].
Unfortunately, Pakistan lacks empirical evidences on the impact of
government social spending. Although Government of Pakistan has taken
number of initiatives to have some form of redistribution policies,
however, inequality in Pakistan is higher as compared to other Least
Developed Countries that are open to trade. This situation is alarming.
This paper therefore tries to identify the nexus between trade openness
and social spending for the period 1975–2012. International evidence
suggests that government social spending influences poverty and
distribution of income. Pakistan‘s low level achievement in terms of
reducing inequality, given the likely adverse economic impact of trade
openness, point towards the fact that government has to design the
policy in such a way that it affects the distribution of income. Thus,
exploring the effect of social spending on income inequality is
necessary for the concerned policy makers
Inclusive Growth with Zakat
Get PDFZakat is an annual religious levy that is collected from rich
Muslims and its proceeds are disbursed among poor people of the society.
It has many spiritual and social merits. For example, it purifies the
hearts of zakat-givers as they give away a part of their wealth, one of
the most precious things in their lives, seeking the pleasure of God
without requiring any worldly gains whatsoever. It bridges the social
gap between „haves‟ and „have-nots.‟ This study analyses, however, only
economic consequences of Zakat for economic growth. They cannot be
appreciated duly unless one understands the following concepts of modern
economics; various theories of consumption, aggregate demand, stagnation
thesis, consumption puzzle, marginal productivity of capital and Kuznets
curve
The Composite Impact of Institutional Quality and Inequality on Economic Growth
Get PDFThe relationship between institutions and economic growth has
attracted significant attention in recent years with the dominant view
being that institutional quality positively influences economic
performance of a country. However, the impact of similar kind of
institutions on economic growth varies across regions and countries.
Various reasons including, Income inequality and ethnic fragmentation
have been put forth as proximate cause of the weaker relationship
between institutions and economic growth [Easterly, et. al (2006);
Ann-Sofie (2007)]. However not enough literature is available on why the
impact of similar set of institutions on growth varies across countries
and regions. Given that inequality may weaken the impact of
institutional quality on growth, this study seeks to examine the
composite impact of institutional quality and inequality on growth in
selected Asian economie
Kaushik Basu. Beyond the Invisible Hand: Groundwork for a New Economics. Princeton, USA: Princeton University Press. 2010. 312 pages. US$ 39.95.
Get PDFKaushik Basu’s “Beyond Invisible Hand” is an illustration of
critique on perceived complexities and muddled outcome of Smith’s free
market ideology and mainstream economics. The book starts by comparing
rules, rights and regulations in early times with the present one, where
innovation has changed the dynamics of living standards but market and
economic atrocities are more and less the same. Markets remain in
function to provide goods and services but “market tactics” have created
a divide between people so much that it was never thought of in ancient
times. The economic and social status of the poor remains stagnant while
the rich collect every penny from the market system. Those who have
taken advantage of the system, support to keep the system well-oiled and
humming. Opponents of the market system have little to present and have
not been able to design a mechanism to replace the market system,
nonetheless rampages and marching mobs are the anecdotal evidence of
those getting nothing or a meagre portion from current world economic
order. Today’s economic and social process is not what it ought to be;
it is more venal then what is being suggested in the economics
textbooks
Trade Liberalisation, Health Care and International Fragmentation: The Role of Health Capital Mobility
Get PDFThis paper delves into the complex relationship between health
trade through international fragmentation and health trade through
commercial presence. A neo-classical full employment four sector static
general equilibrium model has been developed, where the three sectors
produce final products except the health intermediate goods producing
sector. The paper shows that expansion of health trade through
commercial presence implies, under some reasonable conditions,
enhancement of the volume of health trade through international
fragmentation. It also shows that the composite volume of trade in
health services through international fragmentation and commercial
presence increases the size of the health care in our stylised small
open economy. JEL Classification: I10, F11, F21, D58 Keywords: Health
Sector, Health Intermediate Sector, International Fragmentation and
International Health Capital Mobilit
Energy Consumption, Trade and GDP: A Case Study of South Asian Countries
Get PDFAcute shortage of energy sources in developing countries in
general and South Asian countries in particular has shown that energy
has become a binding input for any production process. Nowadays
operation of heavy machinery and electrical equipment, and
transportation of raw material and final products from their place of
origination to their destination require heavy consumption of energy in
one form or the other. Therefore, energy consumption that was previously
ignored in the production function of a firm and an economy is now
considered a vital input in production process. It affects GDP directly
as by increasing energy consumption; more output can be produced with
given stock of capital and labor force in a country. Also uninterrupted
availability of energy at reasonable cost improves competiveness of home
products in international markets and thus increases exports of home
country a great deal. Resulting increase in net exports further adds to
the GDP through multiplier effec
Gender and Ultimatum in Pakistan: Revisited
Get PDFRazzaque (2009) studied the role of gender in the ultimatum
game by running experiments on students in various cities in Pakistan.
He used standard confirmatory data analysis techniques, which work well
in familiar contexts, where relevant hypotheses of interest are known in
advance. Our goal in this paper is to demonstrate that exploratory data
analysis is much better suited to the study of experimental data where
the goal is to discover patterns of interest. Our exploratory
re-analysis of the original data set of Razzaque (2009) leads to several
new insights. While we re-confirm the main finding of Razzaque regarding
the greater generosity of males, additional analysis suggests that this
is driven by student subculture in Pakistan, and would not generalise to
the population at large. In addition, we find strong effect of
urbanisation. Our exploratory data analysis also offers considerable
additional insights into the learning process that takes place over the
course of a sequence of games. JEL Classification: C78, C81, C91, J16
Keywords: Ultimatum Game, Gender Differences, Exploratory Data
Analysi
Determinants of Energy Inflation in Pakistan: An Empirical Analysis
Get PDFEnergy inflation has remained a significant topic in
macroeconomic policy for the past few decades. This is due to several
reasons pertaining to both demand and supply sides. In addition, the
history of energy prices has also been characterised by extreme
volatilities, Hamilton (2008). This makes forecasting and modelling of
energy prices difficult, nevertheless it is important to model and
forecast energy prices in all economies. In this paper we have tried to
identify the determinants of energy inflation in Pakistan. Energy
products are a critical component in any economy, serving as a core
input, particularly in manufacturing industries. Moreover, the demand
for energy and fuel comes from households fuelling cars and kitchens for
which other alternatives are not easily available. This renders the
demand inelastic compared to any other good [Edelstein and Kilian
(2009)], making economies vulnerable to supply and price shocks. The
energy price inflation therefore through cost push inflation and
demand-pull inflation has a major impact on core inflation itself,
thereby playing a significant role in macroeconomic health of a country.
As predicted by Ben Bernanke for the US in 2006, “in the long run energy
prices can reduce the productive capacity of US economy if high energy
costs make businesses less willing to invest new capital”. The nature of
the energy market itself creates a major gap between the oil consumers
and oil producers. Whilst demand is inelastic everywhere, supply is
limited and is difficult to increase, and confined to certain regions on
Earth. This is true particularly for two of the most common energy
types: oil and gasoline. The supply of oil is controlled by a few
countries, and supply shocks therefore lead to an immediate surge in
prices