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Does Trade Openness Reduce Inflation? Empirical Evidence from Pakistan
Tahir Mukhtar
Published:July - Dec 2010
One of the more celebrated propositions found in international trade is
the case that trade liberalization is associated with declining prices, so that
protectionism is inflationary. In line with this view, Romer (1993) postulates the
hypothesis that inflation is lower in small and open economies. The objective of
this study is to examine Romer’s hypothesis in Pakistan. For this purpose, we
have used multivariate cointegration and a vector error correction model. The
study covers the period from 1960 to 2007. The empirical findings under the
cointegration test show that there is a significant negative long-run relationship
between inflation and trade openness, which confirms the existence of Romer’s
hypothesis in Pakistan.
KEYWORDS:
Trade openness,
inflation,
cointegration,
vector error correction model,
Pakistan.
JEL:
F41,
C22,
O53.
Adopting Inflation Targeting in Pakistan: An Empirical Analysis
Nadia Saleem
Published:July - Dec 2010
The objective of this paper is to assess the conditions for inflation
targeting in Pakistan. The recent inflationary surge in Pakistan calls for
rethinking monetary policy afresh. This paper argues the case for inflation
targeting in Pakistan as a policy option to achieve price stability. The country
experienced an inflation rate of just below 10 percent during 1970-2009, which
makes it a potential candidate for inflation targeting. Applying the VAR
technique to data for the same period, inflation is shown to be adaptive in nature,
leading us to reject the accelerationist hypothesis. The Lucas critique holds as
people are found to use forward-looking models in forming expectations about
inflation. The paper also sheds some light on the State Bank of Pakistan’s level of
preparedness for the possibility of adopting inflation targeting, for which
transparency and autonomy are prerequisites. The interest rate channel can play
the role of a nominal anchor in the long run.
KEYWORDS:
Monetary policy,
central bank,
inflation targeting,
Pakistan.
JEL:
E31,
E52,
C32.
Measurement and Decomposition of Consumption Inequality in Pakistan
Muhammad Idrees and Eatzaz Ahmad
Published:July - Dec 2010
This paper shows that inequality in consumption expenditure in
Pakistan improved slightly between 1992/93 and 2004/05, and that the extent of
inequality in food consumption has remained substantially lower than in nonfood
consumption. An important result is that household expenditure on education
has been more unequally distributed than overall consumption expenditures. In
contrast, healthcare expenditure in urban areas has been distributed relatively
more evenly in recent years, while the level of inequality in healthcare
expenditures in rural areas has remained persistent and somewhat higher.
KEYWORDS:
Consumption inequality,
decomposition,
Gini coefficient,
Pakistan.
JEL:
D63,
D6,
I3,
D31.
Fiscal Marksmanship in Pakistan
Muhammad Zakaria and Shujat Ali
Published:July - Dec 2010
Using Theil’s inequality coefficient based on the mean square prediction error, this paper evaluates the forecasting efficiency of the central government budget and revised budget estimates in Pakistan for the period 1987/88 to 2007/08 and decomposes the errors into biasedness, unequal variation and random components to analyze the source of error. The results reveal that budgetary forecasting is inefficient in Pakistan and the error is due mainly to exogenous variables (random factors). We also find that neither the budget nor revised budget estimates of revenue and expenditure satisfy the criteria of rational expectations of forecasting. Further, there is very little evidence of improvement in the efficiency of budgetary forecasts over time.
KEYWORDS:
Budget,
Forecast errors,
Theil’s inequality coefficient,
rational expectations,
Pakistan.
JEL:
C53,
E62,
H68.
A Note on the Pricing of Liquidity in Stock Returns
Nawazish Mirza
Published:July - Dec 2010
Keynes (1930) proposed that an asset is more liquid than another “if it is more certainly realisable at short notice without loss” (vol. II, p. 67). This definition suggests that the liquidity of an asset is twofold. First, an asset should have a market that can readily absorb the sale, and second, do so without risk to its final value. This suggests that investors should be rewarded for both the level of liquidity and liquidity risk. The standard form of asset pricing models assumes financial markets to be perfectly liquid. In a perfectly liquid market, there are no arbitrage possibilities. Therefore, the under traditional asset pricing approach, all assets that have similar expected cash flows must have the same price. This phenomenon of frictionless markets ignores the impact of liquidity of financial assets on their respective prices and consequently on returns. The relation between liquidity and expected returns has been statistically observed and explains certain market anomalies such as the small firm effect, equity premium, and risk-free rate puzzle.
KEYWORDS:
stock returns,
Liquidity,
frictionless markets.
JEL:
N/A.
Evaluation of Rice Markets Integration in Bangladesh
Mohammad Ismail Hossain and Wim Verbeke
Published:July - Dec 2010
The liberalization of the agricultural sector in general and the rice
subsector in particular has been a major component of Bangladesh’s structural
adjustment program initiated in 1992. However, the government has continued
to intervene in the rice subsector. This paper examines whether the
regional/divisional rice markets have become spatially integrated following the
liberalization of the rice market. Wholesale weekly coarse rice prices at six
divisional levels over the period of January 2004 to November 2006 were used to
test the degree of market integration in Bangladesh using co-integration analysis
and a vector error correction model (VECM). The Johansen co-integration test
indicated that there are at least three co-integrating vectors implying that rice
markets in Bangladesh during the study period are moderately linked together
and therefore the long-run equilibrium is stable. The short-run market
integration as measured by the magnitude of market interdependence and the
speed of price transmission between the divisional markets has been weak.
KEYWORDS:
Market liberalization,
integration,
vector error correction model,
rice,
price transmission,
Bangladesh.
JEL:
Q11,
D40.
Published:Sept 2010
The Sixth Annual Conference on the Management of the Pakistan
Economy was hosted by the Center for Research in Economics and Business
(CREB) of the Lahore School of Economics from April 22nd to April 23rd,
2010 and the annual Special Edition of the Lahore Journal of Economics
contains the Papers and Proceedings of this conference. The objective of
the conference was to promote discussion on economic management and
strategic issues facing Pakistan today, because if the country can successfully
deal with key challenges, it can make the transition to a middle income
country by 2020. These challenges include addressing the recurrent energy
crises, overcoming the persistent poor government revenue mobilization
effort and bridging the growing regional disparities and lack of trust
between the four provinces.
KEYWORDS:
Pakistan,
Lahore School,
Annual Conference,
CREB,
Sixth,
economic management.
JEL:
N/A.
Provincial Rights and Responsibilities
Shahid Javed Burki
Published:Sept 2010
This article suggests that Pakistan requires a different development
paradigm. The analysis begins by giving a quick overview of some of the
larger economies of the region and assesses the divisions that have
developed between the people as a result of national strategies. The paper
goes on to present a brief history of the previous attempts at
decentralization in Pakistan and a discussion of how these were thwarted.
This is followed by a discussion of how decentralization can be successful
in Pakistan after the 18th Amendment and the 7th NFC Award.
KEYWORDS:
Development,
policy,
decentralization,
Pakistan.
JEL:
O20,
O23,
H77.
The Endemic Crisis of Federalism in Pakistan
Raza Ahmad
Published:Sept 2010
This paper looks at the issue of federalism in Pakistan. It begins
with an analysis of the conceptual paradigms of federalism and goes on to
examine the history of federalism in Pakistan. The paper goes on to discuss
the reasons for the failure to develop an organic federal covenant as well as
discuss how the 7th National Finance Commission (NFC) Award and the
18th Amendment may be indicative of a paradigm shift. The paper
concludes by presenting the way forward for federalism in Pakistan.
KEYWORDS:
Federalism,
governance,
Pakistan.
JEL:
H77,
O2.
Pakistan’s Energy Sector Issues: Energy Efficiency and Energy Environmental Links
Tariq Husain
Published:Sept 2010
This paper analyzes Pakistan’s energy sector issues and highlights (i)
the importance of the link between energy and the environment, and (ii)
the central importance of energy efficiency for high return demand-side
solutions to meet the country’s energy needs. The paper argues that energy
planning should integrate the external cost of energy use in deciding about
the composition of supply: coal, oil, gas, hydropower, renewable, nuclear,
and solar. By utilizing external cost estimates made by the European
Commission for Europe, and the US National Academy of Sciences, a total
cost (external + internal) ranking of primary energy sources for Pakistan is
estimated. This estimate is at the low end of the cost spectrum because
classic pollutants—sulfur dioxide, nitrogen oxides, carbon monoxide—in
Pakistan are significantly higher than in Europe or the US. The paper also
discusses the experiences of China and OECD countries in increasing
energy-wide efficiency. A central lesson emerging from the analysis is that
Pakistan will have to significantly increase its energy-related research and
development expenditure in order to adequately address its energy sector
issues. A quadrupling from 0.25 % of gross domestic product is
recommended over a decade.
KEYWORDS:
Energy,
policy,
environment,
Pakistan.
JEL:
Q48,
Q47,
Q5.