Foreign Aid and Growth Nexus in Pakistan: The Role of Macroeconomic Policies

Despite receiving large quantities of foreign aid, Pakistan, like many other developing countries, has remained stagnant and become more aiddependent. This grim reality has provoke d a vigorous debate on the effectiveness of aid. This study examines the effectiveness of aid, focusing on the ongoing debate on the interactive effect of aid and policy on sustainable economic growth. The empirical analysis is based on the ARDL cointegration approach, using the data for the period 1960 to 2008. The empirical findings are that foreign aid and real GDP have a negative relationship, while the aid-policy interactive term and real GDP growth have a positive and significant relationship. Interesting results emerge when aid-GDP alone is introduced into the growth equation and has an insignificant positive coefficient in the long run and a negative and weakly significant coefficient in the short run, while the aidpolicy interactive term has a positive and significant coefficient both in the short run and the long run. When we disaggregate aid in terms of the bilateral and multilateral components, bilateral aid is significantly positive in the short run and multilateral aid is insignificant, while the aid interactive term is positive in both cases. The results strongly support the view that foreign aid does have a positive impact on economic growth in Pakistan, though conditionally so, i.e., if based on sound macroeconomic policies.Foreign Aid, Macroeconomic policies, Economic Growth, Pakistan, ARDL

Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan

Under the current managed float exchange rate system; the central bank may respond to an exchange market disequilibria by changing either the international reserves or the exchange rates. Under such a regime, a major policy difficulty is the interaction between exchange rate policies and monetary policies. The monetary authorities intervene in the exchange market in response to undesired fluctuations in exchange rates,1 could adversely affect monetary control and move the economy away from internal target such as price stability. Under such a policy dilemma, fully sterilised intervention2 involves a pure swap of foreign and domestic assets, which have not effect on the money supply, received greater attention by the policy-makers in early 1980s, particularly, through the experience of West Germany [Obstfeld (1983)]. Ideally, it provides an independent policy tool to deal with the exchange rate without affecting the internal policy targets. Moreover, it is argues that fully sterilised intervention insulate domestic policies completely from balance of payments considerations. Further, the effects of intervention on exchange rates are close to zero if intervention is completely sterilised. Given this conviction, it is hard to see why the central bank would intervene in the foreign exchange market and sterilised completely at the same time [Neumann (1984)]. It is further argued that sterilisation is capable to move exchange rates through either a portfolio or signaling channel. In developing countries, an intervention may not be used purely to stabilise exchange rate but to reduce its impacts of volatile exchange rates on price level.

Trade Liberalisation, Financial Development and Economic Growth

This paper empirically investigates the impact of trade and financial liberalisation on economic growth in Pakistan using annual observations over the period 1961-2005. The analysis is based on the bound testing approach of cointegration advanced by Pesaran, et al. (2001). The empirical findings suggest that both trade and financial policies play an important role in enhancing economic growth in Pakistan in the long-run. However, the short-run responses of the real deposit rate and trade policy variables are very low, suggesting further acceleration of the reform process. The feedback coefficient suggests a very slow rate of adjustment towards long-run equilibrium. The estimated equation remains stable over the period of study as indicated by CUSUM and CUSUMQ stability tests.Trade Liberalisation, financial development, economic growth, Bound Test

Trade,Financial and Growth Nexus in Pakistan

This paper empirically investigates the impact of trade and financial liberalization on economic growth in Pakistan using annual observations over the period 1961-2005. The analysis is based on the bound testing approach of cointegration advanced by Pesaran et al (2001). The empirical findings suggest that both trade and financial liberalization policies play an important role in nhancing economic growth in Pakistan in the long-run. However, the short-run responses of real deposit rate and trade policy variables are very low, suggesting further acceleration of reform process. The feedback coefficient suggests a very slow rate of adjustment towards long-run equilibrium. The estimated equation remains stable over the period of study as indicated by CUSUM and CUSUMQ stability tests.Trade Liberalization, Financial Development, Economic Growth, Bound Test