The Impact of Key Macroeconomic Determinants on Pakistan’s Economy

Abstract

This paper intended to analyze key Macroeconomic factor’s effect on Pakistan’s economic development. The annual time-series data has been taken from 1980 to 2018 on External Debts, Foreign Direct investment. Consumer Price Index and Term of Trade. Variables stationarity is analyzed by ADF and Ng-Perron tests; afterwards, JJ test and Granger Causality test are used for Long-run (LR) & Short-run(SR) associations between variables, respectively. Also, Residuals Diagnostic Test used for checking residuals assumptions and CUSUM and CUSUMSQ are used for checking parameter constancy. The result shows significantly negative and positive long-run effects of External Debts and Foreign Direct Investment (FDI) respectively on the economic growth of Pakistan. Albeit, Consumer Price Index (CPI), Term of Trade (TOT) and, FDI significantly Granger cause economic growth in the short-run. Research suggests that economic policies devised in such a way that deteriorates External Debts and attract foreign investments and strengthen the economic growth of Pakistan in the long-term.