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Pakistan Economy DSGE Model with Informality

Author

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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.

Suggested Citation

  • Ahmed, Shahzad & Ahmed, Waqas & Khan, Sajawal & Pasha, Farooq & Rehman, Muhammad, 2012. "Pakistan Economy DSGE Model with Informality," MPRA Paper 53135, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:53135
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    References listed on IDEAS

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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 609-681.
    2. Shahid, Muhammad & Qayyum, Abdul & Shahid, Waseem, 2016. "Fiscal and Monetary Policy Interactions in Pakistan Using a Dynamic Stochastic General Equilibrium Framework," MPRA Paper 72595, University Library of Munich, Germany.
    3. Shahzada M. Naeem Nawaz & Ather Maqsood Ahmed, 2015. "New Keynesian Macroeconomic Model and Monetary Policy in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 54(1), pages 55-71.
    4. Ahmed, Waqas & Rehman, Muhammad & Malik, Jahanzeb, 2013. "Quarterly Bayesian DSGE Model of Pakistan Economy with Informality," MPRA Paper 53168, University Library of Munich, Germany.
    5. Lahcen, Mohammed Ait, 2014. "DSGE models for developing economies: an application to Morocco," MPRA Paper 63404, University Library of Munich, Germany.
    6. 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.

    More about this item

    Keywords

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

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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