Pakistan Institute of Development Economics



Macroeconomic Policies and the Pakistan’s Economy

For forecasting and policy analysis, large simultaneous equation econometric models are routinely used today in many developing countries. In the beginning there was growing enthusiasm about the effectiveness and relevance of Keynesian Macroeconometric models. However, the development of macroeconometric models with Rational Expectations has created much suspicion regarding the validity ofthe a priori restrictions [known as Lucas (1976) critique] used to identify Keynesian macroeconometric models. The response to this. dissatisfaction led to the development of macroeconometric models proposed by Sims (1980, 1982 and 1986~ Doan, Litterman and Sims (1984) and Litterman (1984), which use the modem time series techniques known as vector autoregression (V AR) models. The V AR modelling avoids imposing potentially spurious a priori restrictions on the model. In fact, the V AR model does not require any explicit economic theory to estimate a model. Moreover, it allows one to capture empirical regularities in the data and thereby provide insight into channels through which the different policy variables operates. Pakistan is relatively a latecomer in the field of macro-models. The only large-scale model is the PIDE Macroeconometric Model of 1983 which is a refinement of its earlier version of 1982. This model consists of 33 behavioural and 25 definitional equations with 58 endogenous and 35 exogenous variables. Almost all price variables are exogenous. The production and expenditure block (the largest of the three blocks of the model), consisting of 34 equations is completely static. The use of a large number of exogenous variables in the macroeconomic model has rendered the forecasting capability seriously limited.

Salim U. Chishti, M. Aynul Hasan, Syed F. Mahmud

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