'Pakistan Institute of Development Economics (PIDE)'
Doi
Abstract
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