Policies Misalignment in Pakistan: Implications for Output Gaps
Journal Title: Pakistan Journal of Economic Studies - Year 2023, Vol 6, Issue 2
Abstract
Objective: Adjusting macroeconomic, monetary, and fiscal policies to maximize growth requires reliable production gap estimates. This research aims to determine sector-wise output gaps and their impact on macroeconomic production gaps. Research Gap: In macroeconomics aggregate and static macro models are common but this type of modeling is inadequate due to macroeconomic aggregation assumptions and implied static interactions. Therefore, the inability to accurately model the output gap and growth trajectories miscalculates the policy projections leading to deviations between policy and its implementation. Insufficient technical integration of diverse policies and aggregative politically directed actions that do not match economic reality complicate policy misalignment. This study uses a detailed disaggregated examination of Pakistan's economy to increase empirical econometric knowledge of these gaps. Design/Methodology/Approach: This study estimates sector wise potential output and output gap to assess policies’ effectiveness across different sectors of the economy. The study employs Autoregressive Distributed Lag (ARDL) Model to estimate potential output at the aggregate level and for subsectors of the economy. The Main Findings: We find a strong correlation between the growth rates of potential output in industry and services sectors at the aggregate level while the correlation with the agriculture sector is the weakest. Shocks in aggregate economic activity adversely impact industrial sector, followed by the services sector. However, the agriculture sector is least affected by these shocks. In case of monetary policy shocks, agricultural output is insensitive to interest rate, while industrial and service sector output gaps are significantly affected. Contrary to this, impact of fiscal policy shocks impact on output gaps of all three sectors is insignificant. Theoretical/Practical Implications of the Findings: It is observed that the policy is confronted with a dilemma specifically demand management policies are limiting the potential growth of output in Pakistan. There is need to focus on supply side of sectors and policy reorientation towards stimulation of investments.
Authors and Affiliations
Muhamad Shuaib Malik, Abdul Jabbar
Keywords
Related Articles
- EP ID EP735725
- DOI -
- Views 10
- Downloads 0
Mapping the Causal Connections betweenExchange Rate Fluctuations and AgricultureProduction: New Evidence fromPakistanUtilizing CointegrationAnalysis
This study is on the foreign exchange rate and export sector and its impact on macroeconomic variables. The objective is to research the experiential association between the rate of exchange and the...
Does foreign aid with political strings dampen or heighten growth? An analysis of aid-growth nexus in Pakistan
Pakistan has received around 1.3 billion dollars (current US$) on an annual basis from 1972 to 2014 in the form of bilateral and multilateral aid. While Pakistan’s per capita GDP (current US$) rose from 152 US$ in 1972 t...
The Conduct of Monetary Policy in Pakistan
The conduct of monetary policy is not a frictionless combination of monetary operations as in the case of Keynesian demand for liquidity, nor as mechanical as under the New Keynesian Taylor Rule. Ignoring the issue of ou...
Measuring Sustainable Development through Eco-efficiency: A Case Study of Mega Cities of Pakistan
Imbalanced and unplanned social and economic development along with urbanization is the main reasons for environmental degradation in Pakistan. Eco-efficiency approach is used to make development tangible so that sustain...
Vertical Fiscal Imbalance, Economic Growth and Decentralization
Irrespective of the degree of tax and expenditure decentralization, every federation and unitary state face the problem of Vertical Fiscal Imbalance (VFI). The transfer dependency of subnational governments led t...