The Impacts of Financial Crisis on Pakistan Economy: An Empirical Approach

Abstract

Financial crisis is an economic situation in which the economy of a country faces some unanticipated downturn or recession, price fluctuations, current account deficits and uncertainty on foreign sector. Main objective of this paper is to measure the long run econometric association between key macroeconomic indicators of financial crisis in Pakistan economy. Secondary data was collected from the annual reports of state bank of Pakistan, economic surveys (2000-2014) and from the IMF database for the period of 2000 to 2014 which latterly transformed into quarterly data for better estimation. Vector Auto-regression (VAR) estimation with the lag length of one with all related applications have been employed in this research to check the long run association among the variables included in the research. Result explains the significant long run associations among the GDP, Inflation, Balance of Trade and Current Account Balance. After applying the augmented Dickey Fuller test it is revealed that the data is facing the problem of non-stationary. To make the data stationary, first difference has been used to make the data stationary and enabling it for further uses. Using the results of VAR estimation system equations also have been generated. In order to check the individual significance of the equations ordinary least square method (OLS) has been used in the research. Result explains that most of the probability values are less than five percent. Further all the R squared values relevant to estimated model are quite high which represent the goodness of fit. The corresponding probability value of F statistic, is less than five percent for all the cases, witnessed the jointly significance of the variables included in the study.