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

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.