This paper aims to provide a more comprehensive understanding of the impact of financial developments on output volatility. Using cross-sectional and panel datasets for 79 countries from 1961 to 2012, we find that financial expansion plays a significant role in mitigating output volatility, although the evidence is weak in some cases. The role of financial stability is more prominent than that of other measures of financial growth in mitigating output volatility. The volatility of terms of trade and inflation contributes positively to increasing output volatility. We also evaluate the channels through which financial developments can affect output volatility. Our model investigates the link between financial growth and output volatility through two potential channels, using four measures of financial development. The volatility of inflation and of terms of trade are used as proxies for monetary sector and real sector volatility, respectively. Financial development plays a mixed role in amplifying or mitigating output volatility through real and monetary sector volatility. Overall, there is some evidence to suggest that financial development amplifies monetary sector volatility, but weaker evidence that real sector volatility is reduced by financial development.
KEYWORDS: Output volatility, financial development, panel data.
JEL: O16, E30, E51, G20.

This study examines the impact of migration on children left behind in terms of schooling and child labor by quantifying two aspects of migration: remittances and parental absence, in cases where the father is the migrant. The study is based on a panel analysis of data drawn from the Multiple Indicator Cluster Survey for 2007 and the Privatization in Education Research Initiative survey for 2011. The sample comprises 820 households with children aged 5–14 years. The study uses the instrumental variable (IV) approach due to endogeneity. Exogenous variation in parental absence and remittances sent by migrants from a given kinship network are employed as IVs. This, combined with household fixed effects and random effects, increases the reliability of the results. While remittances benefit the children, father’s absence has adverse consequences for them. However, mother’s presence in the house appears to compensate for the father’s absence, making the migration beneficial on net for the child. The father’s absence has worse consequences for girls in terms of increased child labor, where the money coming in through remittances has a larger impact on boys’ schooling.
KEYWORDS: Migration, remittances, schooling, child labor, mother presence, Pakistan.
JEL: F24, O15.

Using a structural vector autoregressive model, this study investigates the extent to which international oil price shocks have influenced the Chinese economy over the period 1991–2014. Given China’s intensified macroeconomic activity and its increasing demand for energy resources, we also examine the endogenous response of international oil prices to economic conditions in the country. To that end, we derive and empirically estimate a small open-economy New Keynesian model for China and the rest of the world. Our results show that the Chinese economy is relatively more sensitive to global economic conditions than to domestic policy actions. Global productivity shocks appear to be the most important variable causing Chinese macroeconomic activity through trade, where oil prices impact aggregate demand negatively.
KEYWORDS: Globalization, macroeconomic fluctuations, oil price shocks, SVAR, China.
JEL: E32, F41, Q43.

This article analyzes the correlation between trade liberalization and welfare in Pakistan from 1986 to 2015. Using consumption expenditure as a measure of welfare, we estimate the relationship using a vector error correction model. The empirical results show that trade liberalization does not have an immediate correlation with welfare: it takes some time for liberalization policies to enhance welfare. The findings also suggest that trade liberalization can help reduce poverty, decrease inequality and increase enrollment levels in the long run. But in the short run, trade liberalization has led to higher income inequality.
KEYWORDS: Welfare, trade liberalization, social indicators, Pakistan.
JEL: G15, F65.

This article examines the dynamic linkages between Pakistan’s emerging stock market and (i) the US market and (ii) the regional markets of India and Japan. Using data for the daily returns and volatility spillovers of three market pairs (Pakistan-US, Pakistan-Japan and Pakistan-India), the study estimates a series of bivariate asymmetric VARMA(1,1)-GARCH(1,1) models. It also fits multivariate asymmetric VARMA(1,1)-GARCH(1,1) models for two groups of markets: Pakistan-India-US and Pakistan-India-Japan. Based on the mean spillovers, the results suggest that the global and regional equity markets (Granger) cause the Pakistani market. There are unidirectional volatility spillovers to Pakistan from the US and Japan, while India is the only regional market with a significant cross-asymmetric effect on Pakistan. In the multivariate case, the regional and global markets have significant joint mean and variance spillovers and asymmetric effects on the Pakistani market. This indicates a weak degree of integration between the Pakistani market and the global and regional markets, implying that local risk factors – either firm-specific or country-specific – explain the expected returns on investment in the Pakistani stock market.
KEYWORDS: Dynamic linkages, bivariate GARCH, financial market integration.
JEL: G15, F65.

This paper tests the validity of the q-factor model on stocks listed on the Karachi Stock Exchange in Pakistan. The q-factor model is an investment-based factor model that explains stock returns based on market, profitability, investment and size factors and it tends to outperform the traditional CAPM, the Fama and French (1993) three-factor model and Carhart (1997) four-factor model, with some exceptions. While the model has been tested using data from stock markets in developed countries, the dynamics of emerging stock markets are significantly different, warranting a reapplication of the model to average stock returns in a developing market. We use data from the Karachi Stock Exchange to test the model in an emerging market context. The results show that, as firms increase their investment, their stock returns decline. Hence, a firm’s investment is conditional on a given level of profitability. The size effect is strongly significant for small firms, but absent for large firms. Finally, the study identifies new factors that give a better understanding of returns in the context of an emerging economy such as Pakistan.
KEYWORDS: Asset pricing, q-factor model, Karachi Stock Exchange, stock return.
JEL: G11, G12.

Most of the earlier literature on poverty in Pakistan uses a single poverty line for the whole country or, at most, relies on a rural-urban divide. This segmentation fails to incorporate differences across provinces. This study estimates different poverty lines for the rural and urban segments of each province and region. Its estimated food, nonfood and overall poverty lines show that, with the exception of the capital territory of Islamabad, the urban poverty line is higher in all regions. The estimates of poverty show that, with the exception of Islamabad Capital Territory, rural poverty is much higher than urban poverty in all regions. We find that 25 percent of urban households and nearly 37 percent of rural households fall below the poverty lines we have defined. The study also finds that poverty measured in terms of households ignores household size and thus suppresses poverty figures.
KEYWORDS: Poverty, income distribution, welfare, Pakistan.
JEL: O15, I30.

The Pakistani economy currently stands at a crossroads; while it has stabilized over the last few years, the focus has turned towards restarting economic growth. This is a challenging task because of structural problems faced by the economy as well as the global economic slowdown. While the economy has avoided a major downturn since the IMF’s package in 2013, economic growth has been sporadic due to a variety of causes, including fiscal deficit, and financial vulnerabilities.
KEYWORDS: Pakistan, economy, policymaker, annual conference.
JEL: N/A.

This article identifies constraints and barriers to growth for small firms in Pakistan, a survey of the existing literature and through in-depth interviews with a sub-sample of firms in two important SME sectors, that is electrical fans and sporting goods. Policy recommendations for the SME sector include addressing problems in contract enforcement (such through alternative dispute settlement mechanisms), promoting R & D through linkages with academia locally and research institutions globally, simplifying of the tax regime to encourage transparency, resolving the energy crisis and rationalize power tariffs, increasing the availability of credit to SMEs (allowing alternative forms of collateral). In addition, more detailed recommendations specific to the fan and sporting goods sectors are also offered.
KEYWORDS: Pakistan, SMEs, light engineering, constraints, electrical fans, sporting goods.
JEL: L10, L60.

As Pakistan enters the CPEC era, there is a sense of optimism as well as concern in the country, given the uncertain economic impact of this major collaboration between China and Pakistan. Using firm-level and trade data, we empirically test the impact of the 2006 free trade agreement (FTA) between the two countries on the productivity, size and value added of potentially affected Pakistani firms. These results have important policy implications for CPEC initiatives. We start with a difference-in-difference analysis, comparing trends in those sectors in Pakistan made more vulnerable by tariff reductions on Chinese goods relative to sectors for which the tariff did not change significantly. Next, we examine those sectors in Pakistan that were given greater access to Chinese markets through reductions in the Chinese tariff on Pakistani goods relative to sectors for which market access remained roughly the same. In the sectors made more vulnerable by reductions in Pakistani tariffs on Chinese goods, imports to Pakistan have risen, while productivity, value added and value added per worker have fallen relative to other sectors since the FTA. In the sectors for which Pakistan gained access to Chinese markets, exports and employment have risen, but productivity and value added have fallen relative to other sectors since the FTA.
KEYWORDS: Pakistan, China, FTA, CPEC.
JEL: F10.