Specification of the Macroeconometric Model of Pakistan

SPECIFICATION
OF THE
MACROECONOMETRIC
MODEL
OF
PAKISTAN*
By
Dr. Hafiz A. Pasha, Shahid Kardar
and Muhammad Imran

*
All rights reserved. No part of the methodology may be reproduced, distributed, or transmitted in any form or by any means,
including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the
authors.

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 1 | Page
Specification of the Macroeconometric Model of Pakistan

List of Variables
Policy Variables
BCE Budgetary Current Expenditure
BDE Budgetary Development Expenditure
DENC Percentage Increase in Energy Cost
DMD Impact of Non-tariff Measures on Imports
EXR Exchange Rate
FEF Extent of Fiscal Effort through Additional Taxation
NTXR Non-Tax Revenue
RO Extent of Roll-over of Maturity of External Debt
RW Real Wage Rate
SIT Share of Indirect Taxes
STD Percentage of Financing of Debt by External Borrowing
SUBS Level of Subsidies
Exogenous Variables
GCP Growth Rate of Dollar Prices on Imported Capital Goods
GMP Growth Rate International Prices of Imports
GXP Growth Rate International Prices of Exports
IMF Level of Borrowing from IMF
NFI Net Factor Income from Abroad
POP Population
SBFI Secondary Income Account
WT World Import of Goods and Services
Endogenous Variables
S Changes in Stocks
BDG Budget Deficit
BDP Budget Deficit (as % of GDP)
CG Public Consumption Expenditure
CHED Change in External Debt
CP Private Consumption Expenditure
DDB Domestic Financing of Budget Deficit
DDRS Level of Domestic Debt
DFB External Financing of Budget Deficit
DFR$ Change in Foreign Exchange Reserves
DMS Change in Money Supply
DPED Rate of Inflation
ED$ Level of External Government Debt in US$
EDRS Level of External Government Debt in Rupees
EMP Employed Labor Force
FAS$ Balance in the Financial Account
FR$ Level of Foreign Exchange Reserves
GDE Government Debt (as % of GDP)
GDRS Total Government Debt
GPCI Per Capita Income Growth
IG Public Investment Expenditure
INTX Level of Indirect Taxes
INVR Level of Investment (as % of GDP)
IP Private Investment Expenditure

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 2 | Page
Specification of the Macroeconometric Model of Pakistan

M Imports of Goods and Services

M$ Imports of Goods and Services in Dollar Value
MBP$ Imports of Goods and Services in Dollar Value from BOP Account
MCV Import Cover Ratio (in months)
MM Money Supply
NIR Nominal Interest Rate
PD Domestic Price
PDEF GDP Deflator
PDRS Total Public Debt
PDRSY Public Debt as Percentage of GDP
POVERTY Leve of Poverty
RIR Real Interest Rate
SIT Share of Indirect Taxes
SVR Level of Saving (as % of GDP)
TDF$ Trade Deficit
TXR Tax Revenue
UVIC Unit Value Index of Capital Goods Imports
UVIM Unit Value Index of Imports
UVIX Unit Value Index of Exports
X Exports of Goods and Services
X$ Exports of Goods and Services in Dollar Value
XBP$ Exports of Goods and Services in Dollar Value from BOP Account
YFC Gross Domestic Product (at constant factor)
YM Gross Domestic Product (at constant market prices)

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 3 | Page
Specification of the Macroeconometric Model of Pakistan

EQUATIONS OF THE MODEL

GDP SIZE AND GROWTH
1. The Basic Keynesian Identity:
𝑌𝑀 = 𝐶𝑃 + 𝐶𝐺 + 𝐼𝑃 + 𝐼𝐺 + 𝑋 − 𝑀 + ∆𝑆
2. Private Consumption Expenditure:

𝐶𝑃 = 𝐹 (𝑌𝑀, 𝑁𝐼𝑅, 𝑀, 𝐶𝑃−1 )

3. Public Consumption Expenditure:
𝐶𝐺 = 𝐹 (𝐵𝐶𝐸 ∗ , 𝑃𝐷, 𝐶𝐺−1 )
4. Private Investment Expenditure:
𝐼𝑃 = 𝐹(𝑌𝑀, 𝑅𝐼𝑅, 𝐼𝐺, 𝑈𝑉𝐼𝐶𝑀, 𝑃𝐷, 𝐼𝑃−1 )
5. Public Investment Expenditure:
𝐼𝐺 = 𝐹(𝐵𝐷𝐸 ∗ , 𝑃𝐷, 𝐼𝐺−1 )
6. Exports of Goods and Services:
̅̅̅̅̅, 𝑈𝑉𝑋, 𝑃𝐷, 𝑌𝑀, 𝑋−1 )
𝑋 = 𝐹(𝑊𝑇
7. Imports of Goods and Services:
𝑀 = 𝐹(𝑌𝑀, 𝑈𝑉𝐼𝑀, 𝑃𝐷, 𝑁𝐼𝑅, 𝐷𝑀𝐷∗ , 𝑀−1 )
8. Change in Inventories:
∆𝑆 = 𝐹(𝑌𝑀)
9. GDP at Constant Factor Cost:

𝑌𝐹𝐶 = 𝑌𝑀 − 𝐼𝑇𝑋𝑅 + 𝑆𝑈𝐵𝑆 ∗

10. GDP Growth Rate:
𝑌𝐹𝐶
𝑌𝐺𝑅 = ( − 1) × 100
𝑌𝐹𝐶−1

RATE OF INFLATION
1. Domestic Price Index:

𝑃𝐷 = 𝐹(𝑀𝑀, 𝑈𝑉𝐼𝑀, 𝑌𝑀, 𝐼𝑇𝑋𝑅, 𝐷𝐸𝑁𝐶 ∗ , 𝑃𝐷−1 )

2. GDP Deflator:
𝑃𝐷𝐸𝐹 = 𝐹(𝑃𝐷, 𝑃𝐷𝐸𝐹−1 )
3. Rate of Inflation:
𝑃𝐷
𝐷𝑃𝐸𝐷 = 𝐹 ( − 1) × 100
𝑃𝐷−1

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 4 | Page
Specification of the Macroeconometric Model of Pakistan

LEVEL OF INTEREST RATE

1. Nominal Interest Rate:
𝑁𝐼𝑅 = 𝐹(𝐵𝑈𝐷𝐺, 𝐷𝑃𝐸𝐷, 𝑁𝐼𝑅−1 )
2. Real Interest Rate:
𝑅𝐼𝑅 = 𝑁𝐼𝑅 − 𝐷𝑃𝐸𝐷

MONEY SUPPLY
1. Change in Money Supply:
𝐷𝑀𝑆 = 𝐹(𝑌𝑀, 𝑃𝐷, 𝐵𝐷𝐺, 𝑁𝐼𝑅)
2. Level of Money Supply:
𝑀𝑀 = 𝑀𝑀−1 + 𝐷𝑀𝑆

LEVEL OF INVESTMENT AND SAVINGS

1. Level of Investment (as % of GDP):
𝐼𝐺 + 𝐼𝑃 + ∆𝑆
𝐼𝑁𝑉𝑅 = ( ) × 100
𝑌𝑀
2. Level of Savings (as % of GDP):
̅̅̅̅̅ − 𝐶𝑃 − 𝐶𝐺
𝑌𝑀 + 𝑁𝐹𝐼
𝑆𝑉𝑅 = ( ) × 100
𝑌𝑀

BUDGETARY POSITION
1. Tax Revenues:
𝑇𝑋𝑅 = 𝐹(𝑌𝑀, 𝑃𝐷, 𝑀, 𝑈𝑉𝐼𝑀, 𝐹𝐸𝐹 ∗ , 𝑇𝑋𝑅−1 )
2. Indirect Tax Revenues:

𝐼𝑇𝑋𝑅 = 𝑆𝐼𝑇 ∗ ∙ 𝑇𝑋𝑅

3. Budget Deficit:
𝐵𝐷𝐺 = (𝐵𝐷𝐸 ∗ + 𝐵𝐶𝐸 ∗ ) − (𝑇𝑋𝑅 + 𝑁𝑇𝑋𝑅∗ )
4. Budget Deficit (as % of GDP):
𝐵𝐷𝐺
𝐵𝐷𝑃 = ( ) × 100
𝑌𝑀 ∙ 𝑃𝐷𝐸𝐹
5. External Financing of Budget Deficit:

𝐷𝐹𝐵 = 𝑆𝑇𝐷 ∗ ∙ 𝐵𝐷𝐺

6. Domestic Financing of Budget Deficit:

𝐷𝐷𝐵 = (1 − 𝑆𝑇𝐷 ∗ ) ∙ 𝐵𝐷𝐺

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 5 | Page
Specification of the Macroeconometric Model of Pakistan

7. Change in Government External Debt:

𝐷𝐹𝐵
𝐶𝐻𝐸𝐷 =
𝐸𝑋𝑅∗
8. Level of External Government Debt:

𝐸𝐷$ = 𝐸𝐷$−1 + 𝐶𝐻𝐸𝐷

9. Level of External Government Debt in Rupees:

𝐸𝐷𝑅𝑆 = 𝐸𝐷$ ∙ 𝐸𝑋𝑅∗

10. Level of Domestic Government Debt in Rupees:
𝐷𝐷𝑅𝑆 = 𝐷𝐷𝑅𝑆−1 + 𝐷𝐷𝐵𝐷
11. Total Government Debt:

𝐺𝐷𝑅𝑆 = 𝐷𝐷𝑅𝑆 + 𝐸𝐷𝑅𝑆

12. Government Debt (as % of GDP):
𝐺𝐷𝑅𝑆
𝐺𝐷𝐸 = ( ) × 100
𝑌𝑀 ∙ 𝑃𝐷𝐸𝐹
BALANCE OF PAYMENTS
1. Exports of Goods and Services (in $):
𝑋 ∙ 𝑈𝑉𝐼𝑋
𝑋$ =
𝐸𝑋𝑅∗
2. Imports of Goods and Services (in $):
𝑀 ∙ 𝑈𝑉𝐼𝑀
𝑀$ =
𝐸𝑋𝑅∗
3. Exports of Goods and Services (BOP):
𝑋𝐵𝑃$ = 𝐹(𝑋$, 𝑋𝐵𝑃$−1 )
4. Imports of Goods and Services (BOP):

𝑀𝐵𝑃$ = 𝐹 (𝑀$, 𝑀𝐵𝑃$−1 )

5. Trade Deficit:

𝑇𝐷𝐹$ = 𝑋𝐵𝑃$ − 𝑀𝐵𝑃$

6. Current Account Deficit (in $):

𝐶𝐴𝐷$ = 𝑇𝐷𝐹$ + ̅̅̅̅̅̅̅

𝑆𝐵𝐹𝐼
7. Change in Foreign Exchange Reserves:

𝐷𝐹𝑅$ = 𝐹𝐴𝑆$ − 𝐶𝐴𝐷$ − 𝑅𝑂 ∗ ∙ 𝑈𝐼𝐹 + ̅̅̅̅̅̅

𝐼𝑀𝐹
8. Level of Foreign Exchange Reserves:
𝐹𝑅$ = 𝐹𝑅$−1 + 𝐷𝐹𝑅$

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 6 | Page
Specification of the Macroeconometric Model of Pakistan

9. Import Cover Ratio (in months):

𝐹𝑅$
𝑀𝐶𝑉 = × 12
𝑀$
10. Unit Value Index of Exports:
𝐸𝑋𝑅∗
̅̅̅̅̅̅) ∙
𝑈𝑉𝐼𝑋 = 𝑈𝑉𝐼𝑋−1 ∙ (1 + 𝐺𝑋𝑃
𝐸𝑋𝑅−1
11. Unit Value Index of Imports:
𝐸𝑋𝑅∗
𝑈𝑉𝐼𝑀 = 𝑈𝑉𝐼𝑀−1 ∙ (1 + ̅̅̅̅̅̅̅
𝐺𝑀𝑃) ∙
𝐸𝑋𝑅−1
12. Unit Value Index of Capital Goods Imports:
𝐸𝑋𝑅∗
𝑈𝑉𝐼𝐶 = 𝑈𝑉𝐼𝐶−1 ∙ (1 + ̅̅̅̅̅̅
𝐺𝐶𝑃 ) ∙
𝐸𝑋𝑅−1

EMPLOYMENT
1. Level of Employment:

𝐸𝑀𝑃 = 𝐹 (𝑌𝑀, 𝑅𝑊 ∗ , 𝑋, 𝑀, 𝐸𝑀𝑃−1 )

POVERTY
1. Growth Rate of Per Capita Income:
̅̅̅̅̅̅
𝑃𝑂𝑃
𝐺𝑃𝐶𝐼 = 𝑌𝐺𝑅 − ( − 1) × 100
𝑃𝑂𝑃−1

2. Change in Incidence of Poverty:

∆𝑃𝑂𝑉 = 𝐹(𝐺𝑃𝐶𝐼, 𝐷𝑃𝐷, 𝑈𝑉𝐼𝑀)

SUMMARY OF EQUATIONS
Module Number of Equations
GDP Size and Growth 10
Rate of Inflation 3
Level of Interest Rate 2
Money Supply 2
Level of Investment and Savings 2
Budgetary Position 12
Balance of Payments 12
Employment 1
Poverty 2
TOTAL 46

Notes about the Equations:

1. Variables with * on top are Policy Variables.
2. Variables with ̅ on top are Exogenous Variables.

Authors: Dr. Hafiz A. Pasha, Shahid Kardar and Muhammad Imran 7 | Page