What determines the growth of services sector in Pakistan? A comparison of ARDL bound testing and time varying parametric estimation with general to specific approach

Abstract. This empirical study followed time varying parametric approach (Kalman Filter) and auto regression distributed lag (ARDL) with general to specific approach to find out relevant macroeconomic determinants of Pakistan’s services sector’s growth. To our best of knowledge, no author has made such study that employed these estimation techniques to find out determinants of services sector growth in Pakistan while employing general to specific approach. Current study bridges this gap. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Main findings of the study are that rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. Results show that inflation has negative effect on services sector output growth in case of TVP approach. This result does match with ARDL results.  Net foreign direct investment has positive and significant effect on services sector output growth in both techniques of estimation. Gross national expenditures with positive effect are the relevant significant determinants of services sector output growth at five percent significance level in case of TVP approach while relationship was insignificant in case of ARDL estimation. Impact of remittances received on services sector growth is negative in case of time varying parametric approach. This result is different from ARDL results where relationship is positive and significant at five percent level of significance. All the one step ahead state vectors confirmed the stability of models in case of time varying parametric approach. Cumulative sum of recursive residuals (CUSUM) and cumulative sum of recursive residuals square (CUSUMQ) also confirmed the stability of results of auto regression distributed lag. Based on these empirical findings, we conclude that government should focus on service sector growth augmenting factors while formulating any policy relevant to the concerned sector. Keywords. Services sector, Kalman filter, Rolling regression.JEL. C22, O11, O40

Factors affecting the services sector growth in Pakistan: A time varying parametric approach

Abstract. This empirical study followed time varying parametric approach (Kalman Filter) to find out relevant determinants of Pakistan’s services sector’s growth. To our best of knowledge, no author has made such study that could collect a number of variables from existing empirical literature and capture the impact of structural changes on relevant determinants of services sector growth in Pakistan while employing Kalman Filtering approach. Current study bridges this gap. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Main findings of the study are that rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. The state space Results show that foreign direct investment and gross national expenditures are positive and significant determinants of services sector growth while inflation, domestic credit to private sector, gross fixed capital formation, and remittances received and trade openness have negative impact on services sector growth. One step ahead graph inflation, domestic credit to private sector, foreign direct investment, gross national expenditures, gross fixed capital formation, remittances received and trade openness indicate that model estimated was stable as critical bounds(dotted line) in graph 2 are not crossed by central line. Based on empirical findings, it is recommended the concerned authorities to augment gross national expenditures and foreign direct investment to achieve long run services sector growth for better economic growth in country.Keywords. Services sector, Kalman filter, Rolling regression, Inflation, Foreign direct investment.JEL. F21, F40, N57, O13

Determinants of Agricultural Sector Growth in Pakistan: A Time Varying Parametric Approach

This study followed time varying parametric approach with general to specific to find out the determinants of agricultural sector output growth in Pakistan. No such research study was found out in empirical literature that could collect relevant determinants of agricultural sector to employ time varying parametric approach. Annual data was taken from World Development Indicators (2014) from period 1976 to 2014. Rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. The state space results indicate that gross fixed capital formation, permanent cropland and remittances receipt adversely affects agricultural sector growth. Whereas, gross national expenditure is directly related to agricultural sector growth. These findings recommend to enlarge gross national expenditures and motivate investors to make investments in agricultural sector. Farmers should be given incentives to cultivate cash crops for better profits. Keywords: Kalman Filter, rolling regression, gross national expenditure, agricultural sector growth JEL Classification: E22, E51, F41. 

Determinants of Industrial Sector Growth in Pakistan

Basic purpose to make this study was to find out the determinants of industrial sector growth in Pakistan. Factors were collected from the existing empirical literature. Neo classical model of economic growth was followed and autoregressive distributed lag (ARDL) method of estimation was applied to calculate the results. Augmented Dickey Fuller test was applied to check the presence of unit root in the time series data. Annual data from 1976 to 2014 was chosen to make the analysis. Trade (% of GDP) and Personal remittances, received (% of GDP) showed positive and significant association with Industry, value added (% of GDP) and lag value of industry, value added(% of GDP) showed negative and significant relationship with Industry, value added (% of GDP) in long run. But in short run, differenced lag value of industry, value added (% of GDP) showed negative and significant association with Industry, value added (% of GDP). The remaining variables did not show significant association with industrial growth. Wald test was applied on the long run variables to calculate F.statistic. Calculated F.statistic is higher than both the Pesaran et al. (2001) and Narayan (2004) upper bound critical values at 5% level of significance. Diagnostic test of correlation was conducted through Lagrange Multiplier (LM) test: LM(-1)=2.93(0.10). LM test confirmed that there was no serial correlation. The stability of the model for long run and short run relationship is detected by using the cumulative sum of recursive residuals (CUSUM) that resulted in the stable relationship. Keywords: Industrial sector, Trade, Remittances, ARDL, Wald test, LM test, CUSUM.

Factors Affecting Agricultural Sector Growth in Pakistan: A Structural Vector Auto Regression (SVAR) Analysis

The study followed structural vector auto regression (SVAR) approach proposed by the so-called AB-model of Amisano and Giannini (1997) to find out relevant macroeconomic determinants of agricultural sector growth in Pakistan. Before that ARDL bound testing and TVP approach with general to specific approach were employed to get relevant significant determinants of economic growth. To best of our knowledge no author made such a study in empirical literature that employed above mentioned estimation techniques but current study will bridge this gap. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Akaike information criterion and Schwarz information criterion were considered for the lag length in each estimated equation. Gross fixed capital formation, gross national expenditures, permanent crop land and remittances lead to increase the agricultural sector growth while a positive shock on inflation and population lead to decrease the agricultural sector growth.Based on these empirical findings, we conclude that government should focus on variables augmenting agricultural sector growth while formulating any policy relevant to the concerned sector. Keywords: Structural VAR, Time varying parametric approach, Remittances, economic growth, gross national expenditures and inflation

Determinants of Services Sector Growth in Pakistan: A Time Varying Parametric Approach

This empirical study followed time varying parametric approach to find out relevant macroeconomic determinants of Pakistan’s services sector growth. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Main findings of the study are that rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. The state space results indicate that Table 6.4 shows that inflation has negative and significant effect on services sector output growth at five percent significance level. Net foreign direct investment has positive and significant effect on services sector output growth. Gross national expenditures with positive effect are the relevant significant determinants of services sector output growth at five percent significance level.  Evidence proved that structural changes affect the static results. For effective policy making, it is necessary to employ time varying parametric approach to study the behavior of economy in real sense. Based on empirical findings, it is recommended to concerned authorities to augment gross national expenditures, foreign direct investment and control inflation to achieve long run economic growth in country. Some of the results have been changed when we apply time varying parametric approach like Kalman Filter approach instead of static approach like Auto Regressive Distributive Lag. Keywords: Kalman Filter, rolling regression, inflation, foreign direct investment, gross national expenditure

Factors Affecting Agricultural Sector Growth in Pakistan: A Structural Vector Auto Regression (SVAR) Analysis

This research study followed structural vector auto regression (SVAR) approach proposed by the so-called AB-model of Amisano and Giannini (1997) to find out relevant macroeconomic determinants of agricultural sector growth in Pakistan. Before that ARDL bound testing and TVP approach with general to specific approach were employed to get relevant significant determinants of economic growth. To best of our knowledge no author made such a study in empirical literature that employed above mentioned estimation techniques but current study will bridge this gap. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Akaike information criterion and Schwarz information criterion were considered for the lag length in each estimated equation. Gross fixed capital formation, gross national expenditures, permanent crop land and remittances lead to increase the agricultural sector growth while a positive shock on inflation and population lead to decrease the agricultural sector growth.Based on these empirical findings, we conclude that government should focus on variables augmenting agricultural sector growth while formulating any policy relevant to the concerned sector. Keywords: Structural VAR, Time varying parametric approach, Remittances, economic growth, gross national expenditures and inflation

Determinants of Services Sector Growth in Pakistan

Services sector is one of the important sectors of the economy. It contributes more than half of the GDP and has substantial share in country’s exports and employment. In this study we evaluated the factors affecting services sector output growth using annual data from 1975 to 2014 and ARDL method of estimation. Pakistan’s break up in two wings in December, 1971 and availability of data on most of the variables after 1975 determined the choice of sample period. Results show foreign trade, government expenditures, market size and population growth are the relevant determinants of services sector output growth in long run. In short run, services sector growth is affected by foreign trade and personal remittances. Diagnostic tests show absence of serial correlation and parameter stability. Based on estimated results, it is recommended that relevant authorities should implement policies that increase services sector output growth if they intend to augment overall economic growth of the country

Foreign Direct Investment and Trade Components in Context of Pakistan

Objective of this paper was to evaluate the impact of foreign direct investment (FDI) on trade components (exports and imports) of Pakistan using annual data from 1975 to 2013. Engle and Granger two step cointegration method was used for conducting the analysis. This method was adopted because all the variables of interest were non stationary in level and stationary at first difference. Results provide evidence of long run cointegrating relationship as well as short run relationship between FDI and trade components. A rise in FDI causes both exports and imports to increase. Based on these empirical findings, we strongly recommend Government of Pakistan to focus on the strategy of investment liberalization as well as trade openness

The Impact of Military Expenditures on Economic Growth of Pakistan

The purpose of this research paper is to examine the long run relationship between military expenditure, number of persons in military and economic growth. To fulfill this, the study used ARDL approach for annual time series data from 1990 to 2015. The results show that Pakistan military expenditures are insignificant (military burden for the country is statically insignificant) and number of persons in military are positively and significantly related with GDP growth in long run. The error correction term is negative and significant which shows that short run relationship exists among economic growth, military expenditures and number of army persons. In short run military expenditure and number of persons in military are positively and significantly related with GDP growth but in long run only number of military persons affects economic growth positively and significantly