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A Cointegration Approach to Estimate Private Investment Demand Function of Pakistan

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  • Ali, Sharafat

Abstract

The present study estimates the long run private investment function for the period from 1972 to 2011 by using Johansen cointegration approach. The results suggest debt servicing, inflation and private investment to be negatively associated. The study concludes positive impact of GDP growth rate, foreign direct investment, and exchange rate on private investment in Pakistan. The Wald (χ2) Statistics show that GDP, FDI and exchange rate Granger cause private investment. The significance of coefficient of the error correction term confirms the long run causality between explanatory variables and private investment. The pair-wise Granger causality concludes unidirectional causality from private investment to GDP growth, from private investment to foreign direct investment, inflation rate to private investment and from private investment to exchange rate but causality test confirms bidirectional causality between debt servicing and private investment. The paper also suggests policy recommendations.

Suggested Citation

  • Ali, Sharafat, 2013. "A Cointegration Approach to Estimate Private Investment Demand Function of Pakistan," MPRA Paper 49595, University Library of Munich, Germany, revised 02 Sep 2113.
    • Handle: RePEc:pra:mprapa:49595
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    References listed on IDEAS

    as
    1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    2. Ahmad, Imtiaz & Qayyum, Abdul, 2008. "Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan," MPRA Paper 11673, University Library of Munich, Germany.
    3. Kadir KARAGÖZ, 2010. "Determining Factors of Private Investments: An Empirical Analysis for Turkey," Sosyoekonomi Journal, Sosyoekonomi Society, issue 2010-1.
    4. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    5. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    6. Sajawal Khan & Muhammad Arshad Khan, 2007. "What Determines Private Investment? The Case of Pakistan," Finance Working Papers 22202, East Asian Bureau of Economic Research.
    7. Shahbaz Nasir & Mahmood Khalid, 2004. "Saving-investment Behaviour in Pakistan: An Empirical Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 665-682.
    8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    9. Mohammad Afzal, 2004. "Estimating saving and investment functions in Pakistan," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 41(1), pages 67-78, June.
    10. Javier Andrés & Ignacio Hernando, 1999. "Does Inflation Harm Economic Growth? Evidence from the OECD," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 315-348, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ali, Sharafat, 2014. "Inflation, Income Inequality and Economic Growth in Pakistan: A Cointegration Analysis," MPRA Paper 53706, University Library of Munich, Germany.
    2. Sharafat, Ali & Hamid, Waqas & Muhammad, Asghar & Raheel Abbas, Kalroo & Muhammad, Ayaz & Mukhtyar, Khan, 2013. "Foreign Capital and Investment in Pakistan: A Cointegration and Causality Analysis," MPRA Paper 55640, University Library of Munich, Germany, revised 28 Apr 2013.

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    More about this item

    Keywords

    Asia; Pakistan; Investment; Debt Servicing; Exchange Rate; Foreign Direct Investment; Inflation; Stationarity; Cointegration; Causality.;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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