Determinants of Services Sector Growth in Pakistan: A Time Varying Parametric Approach

Abstract

This empirical study followed time varying parametric approach to find out relevant macroeconomic determinants of Pakistan’s services sector growth. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Main findings of the study are that rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. The state space results indicate that Table 6.4 shows that inflation has negative and significant effect on services sector output growth at five percent significance level. Net foreign direct investment has positive and significant effect on services sector output growth. Gross national expenditures with positive effect are the relevant significant determinants of services sector output growth at five percent significance level.  Evidence proved that structural changes affect the static results. For effective policy making, it is necessary to employ time varying parametric approach to study the behavior of economy in real sense. Based on empirical findings, it is recommended to concerned authorities to augment gross national expenditures, foreign direct investment and control inflation to achieve long run economic growth in country. Some of the results have been changed when we apply time varying parametric approach like Kalman Filter approach instead of static approach like Auto Regressive Distributive Lag.

Keywords: Kalman Filter, rolling regression, inflation, foreign direct investment, gross national expenditures