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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

Author

Listed:
  • Muhammad AJMAIR

    (Department of Economics, Mirpur University of Science & Technology, Mirpur, AJK, Pakistan.)

  • Khadim HUSSAIN

    (Department of Economics, Mirpur University of Science & Technology, Mirpur, AJK, Pakistan.)

  • Sabahat AKRAM

    (Director Planning & Development/Chairperson Department of Economics, University of Management Sciences & Information Technology, Kotli, AJK, Pakistan.)

  • Ambreen ZEB

    (Department of Economics , University of Sindh, Jamshoro, Pakistan.)

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.

Suggested Citation

  • Muhammad AJMAIR & Khadim HUSSAIN & Sabahat AKRAM & Ambreen ZEB, 2017. "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," Turkish Economic Review, EconSciences Journals, vol. 4(3), pages 308-319, September.
    • Handle: RePEc:cvv:journ2:v:4:y:2017:i:3:p:308-319
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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