Pakistan Journal of Applied Economics

31-47

Authors: Chin-Hong PUAH,* & Muzafar Shah HABIBULLAH** & Shazali Abu MANSOR*

The study examines the international evidence on the long-run neutrality (LRN) of money based on low frequency data from five emerging ASEAN economies. namely. Indonesia, Malaysia, the Philippines, Singapore, and Thailand. using a nonstructural reduced-form bivariate ARIMA model proposed by Fisher and Seater (1993). Empirical evidence shows that the classical proposition cannot be rejected with respect to real export, except for Thailand. However, with respect to real output. the LRN test results arc not robust to changes in money supply in countries under study. The narrow monetary aggregate seems to have greater impact on economic activities in Indonesia. Malaysia and Thailand, as compared to the other two countries.

65-84

Authors: G.M. SAJID & Bushra RIAZ*

The relationship between budget deficit, money supply and inflation is not only an important but a controversial issue as well for both academicians and lopicy makers. The objective of the study is to investigate the relationship between budget deficit, money supply and inflation in Pakistan by using the quarterly data from 1971:1 to 2003:4. For this purpose vector error correction techinique is employed. The results of the study show short run causality between budget deficit, money supply (M1 and M2) and inflation. There is unidirectional causality from all measures of inflation (CP1, WP1 and GDP deflator) to budget deficit, and both measures of money supply also cause budget deficit in the short run.

103-121

Authors: Fazal Husain & Abdul Rashid

This study re-examines the causal relations between money and the two variables, i.e., income and prices. Using annual data from 1959-60 to 2003-04, examining the stochastic properties or the variables used in the analysis, and taking care of the shifts in the series due to the start or the economic liberalization program in the early 1990s, we investigate the causal relations between real money and real income, nominal money and nominal income, and nominal money and prices. The analysis indicates. in general, the long run relationship between the money, income. and prices. The analysis further suggests a one way causation from income to money in the long run implying that real factors rather than money supply has played a major role in increasing Pakistan's national income. The study fails to find the active role of money in changing income even after taking care of possible shifts in these variables due to economic reforms. As regards the causal relationship between money and prices. the analysis suggests a uni-directional causality from money to prices, implying that monetary expansion increases inflation in Pakistan.

143-177

Authors: Fadzlan SUFIAN & Muhamed Zulkhibri Abdul MAJID*

The paper investigates the performance of the Malaysian Islamic banking sector during the period 2001-2005. Several efficiency estimates of individual banks are evaluated using non-parametric Data Envelopment Analysis (DEA). Two different approaches have been adopted to differentiate how efficiency scores vary with changes in inputs and outputs. The analysis links the variation in calculated efficiencies to a set of variables. i.e bank size, ownership, capital. non-performing loans and management quality. The findings suggest that during the period of study, scale inefficiency dominates pure technical inefficiency in the Malaysian Islamic banking sector. We found that foreign banks have exhibited higher technical efficiency compared to their domestic peers. The second stage empirical results based on multivariate Tobit model also suggest that technically more efficient banks are larger, have greater loans intensity, and have less non-performing loans on average.

19-43

Authors: Muhammad Ali CHAUDHARY & Muhammad Mahroof KHAN*

This study examines how the use of new technologies has affected substitution among inputs and technological bias. The values of the pair-wise substitution elasticities and demand elasticities are determined by jointly estimating with IZEF, the parameters of the cost and share equations derived from a translog cost function. Time series regressions show that in the pre-Green Revolution period land and labour were strong substitutes for each other but they were weak substitutes for working capital. While the fixed capital was a weak substitute for land and working capital,it was a good substitute for labour. After the Green Revolution era, land and labour continued to be strong substitutes for each other but working capital and fixed capital turned strong complements and the fonner also became a good substitute for land and the latter a weak substitute for labour. Next, the pre-Green Revolution neutral technological bias with respect to fixed and working capital later led to land and labour savings. The results show that intensity of capital in domestic agriculture is on the increase and the dynamics of the new technological and not even the rising input prices have caused the technological bias observed in the analysis.

71-86

Authors: Omohezuaun Peter ERIKI* & David Okoedo-OKOJIE**

The paper examines the causes of inflation in few African countries using an Error Correction Method for Nigeria between 1970 and 2000. The paper uses government current expenditure, inflation rate, ratio of government deficits to Gross Domestic Product, and total money supply as the analytical variables. Using an econometric analysis of time series data, and testing for unit root, co-integration and error correction modeling, the evidence from the regression results shows that the major cause of inflation in Nigeria over the years is government increased budget deficits. Surprisingly, other factors do not have the same significant impact on inflation in Nigeria.

25-35

Authors: Md. Abdul WADUD*

The long-run relationship between exports and economic growth in Bangladesh is examined applying cointegration and Granger causality tests from error-eorrection mechanisms. Different techniques arc utilized to estimate and test the hypotheses about random walk, the cointegration space and error-correction models of the variables: Exports and Gross Domestic Product (GDP). The results confirm that there is a single co integrating vector and a significant unidirectional and positive Granger-causal relationship between exports and GDP running from exports to economic growth.

49-63

Authors: Mahmoodul Hassan KHAN* & Abid A. BURKI**

This paper considers a generalised trans log cost function, which takes care of distortions in factor markets due to the regulatory environment in Pakistan's large-scale manufacturing sector. The paper explores the nature of allocative inefficiencies and evaluates elasticities by employing pooled provincial time-series data of Sindh and Punjab from the CMI. The paper rejects the use of neo-classical assumption of perfect competition in input markets as a maintained hypothesis and argues that price and substitution elasticities produced by previous studies, without incorporating allocative inefficiencies, may be misleading.

79-96

Authors: Shaista ALAM & Muhammad Sabihuddin BUTT

The paper examines the role of structural changes and improvement in energy efficiency of individual sectors in aggregate energy intensity changes in, Pakistan, during 1960-1998. Using a decomposition approach, this study attempts to provide insights into the changes in the structure of the economy and energy intensity that occurred in the economy, during the period under consideration. The estimation identifies and measures cyclical and trend components for both the structural and intensity indices. The cyclical component is being due to changes in output and the trend component is probably due to .changes in technology and consumer preferences.

19-40

Authors: Fazal HUSAIN & Jamshed UPPAL

This paper examines stock returns volatility in the Pakistani equity market. Using daily stock prices of 36 companies, 8 sector indices, and a market index, the Auto Regressive Conditional Heteroscedasticity (ARCH) class of models were applied. The analyses suggest that one of the factors causing high serial dependence in stock returns in the Pakistani equity market is the presence of conditional heteroscedasticity or volatility in stock returns and that even after controlling for volatility the returns in the market are, in general, predictable. The results show GARCH (I, I) to be an appropriate representation of conditional variance implying that current volatility in the market is significantly affected by past volatilities. There is also strong evidence of persistence in variance in returns implying that shocks to volatility continue for a long period. However, after accounting for the structural shift due to opening of the market, the persistence was found to decline significantly.

55-72

Authors: Eatzaz AHMAD & Sheena Naz ALI

This study decomposes major price indices in Pakistan into permanent and transitory components using the Beveridge and Nelson (1981) methodology. The results show that most of the price variations are permanent with a major portion being deterministic. The transitory variations in the consumer price index are only slightly greater than those in the wholesale price index. Therefore, rent-seeking activities at the retail level are limited. Although a similar pattern holds for the open market versus official exchange rates, rent seeking can be prevalent because the market is thin and operates on a spot basis. The study concludes that a forecasting strategy based on the Beveridge-Nelson approach removes the bulk of uncertainty from prices, though risk cannot be avoided.

27-61

Authors: shfaque H. KHAN & Zafar MAHMOOD

Efforts to achieve regional economic integration are not new. The post-World War II era has witnessed the emergence and growing importance of regional economic groupings in many different parts of the world to overcome obstacles to international trade and to isolate the region from the fluctuations of the world economy. The process of regional economic cooperation was initiated by Western Europe in the late 1940s with the formation of the European Coal and Steel Community and subsequently to the Treaty of Rome in 1957 that established the European Economic Community (EEC). The formation of the EEC encouraged some other countries outside the EEC to form the European Free Trade Area (EFT A). The spectacular success of the EEC in the immediate aftermath provided an added impetus to the growing tide of regional integration. Accordingly, a large number of integration schemes, ranging from bilateral or multilateral agreements to sub-regional or regional cooperation, came into existence in different parts of the world.

89-105

Authors: Qazi Masood AHMED

In developing countries fiscal policy is designed to increase economic growth, to reduce inflation and budget deficit. The international comparison of performance of macroeconomic variables shows that the performance of Pakistan's fiscal policy has been satisfactory over the last thirty years in achieving economic growth and maintaining a low price level. However, fiscal policy conspicuously failed to keep the level of budget deficit at manageable levels. During the last decade the government has started implementing suggestions of the IMF/World Bank for Tax Reforms. This paper shows that if the trend of existing reforms is not altered altogether, the advantages of fiscal policy regarding economic growth and inflation will disappear which might damage the economic plan of the government for the year 2010.

121-152

Authors: Mansoor AHMAD & M. Mansoor ALI

Recently the energy sector and the Government energy policies have become one of the more controversial and hotly debated issue of Pakistan's socio-economic scene. The paper presents a picture of the historical growth in power sector, of both demand and supply. The controversial 1994 power policy is then critically discussed. The related problems and policy options available to the government, under the current economic and political constraints, are also outlined. While the lack distribution capacity would suggest that Pakistan has long had a "hidden demand" (the bulk of the country's geographic area is still not connected to the National power grid), power shortages only became a major issue of public debate during the early Eighties when the urban areas of the country first began suffering regularly from "load-shedding" by the public sector utilities. This not only affected the business and industrial sector but was also severely affected the daily routine of households (thus gathering the potential of becoming a major political issue). The controversy reached its height in 1995 when the then Pakistan People's Party (PPP) government announced its private power policy, which envisaged not only the set up of new power units in private sector but also the privatization of state owned power generation units under private sector (mostly foreign) management. While all due credit must be given to the Government for attending to a potentially crippling shortcoming in the economic infrastructure, one must nonetheless also look at the political aspects of the power policy in order to appreciate its various elements. The paper docs this in the end.