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Pakistan Economy DSGE Model with Informality

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  • Ahmed, Shahzad
  • Ahmed, Waqas
  • Khan, Sajawal
  • Pasha, Farooq
  • Rehman, Muhammad

Abstract

In this paper we develop a closed economy DSGE model of Pakistan with informality both in the labor and product markets. We try to remain consistent with the micro-foundations of Pakistan’s economy for the purpose of estimation of the model parameters. However a couple of them have been calibrated to match the long-run features of the Pakistan economy. We introduce exogenous shocks of technology, fiscal spending and nominal interest rate in our model. Despite having to rely on annual data our model performs relatively better than existing DSGE literature on emerging markets. We find good degree of evidence of crowding out of private investment due to increases in government spending as well as spillover effects in the informal sector due to relatively lower intensity hinting at its possible shock absorbing role at the level of sustenance. The impulse response functions, in general, exhibit theoretically correct and empirically sound results.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53135.

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Date of creation: Apr 2012
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Handle: RePEc:pra:mprapa:53135

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Related research

Keywords: DSGE; Informality; Closed Economy; Emerging Markets; Monetary Policy.;

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References

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Citations

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Cited by:
  1. Adnan Haider & Musleh ud Din & Ejaz Ghani, 2012. "Monetary Policy, Informality and Business Cycle Fluctuations in a Developing Economy Vulnerable to External Shocks," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(4), pages 609-682.
  2. Ahmed, Waqas & Rehman, Muhammad & Malik, Jahanzeb, 2013. "Quarterly Bayesian DSGE Model of Pakistan Economy with Informality," MPRA Paper 53168, University Library of Munich, Germany.
  3. Ahmed, Shahzad & Pasha, Farooq, 2014. "The Role of Money in Explaining Business Cycles for a Developing Economy: The Case of Pakistan," MPRA Paper 55262, University Library of Munich, Germany, revised 11 Apr 2014.

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