Dynamics of business cycle and long-term economic growth of Pakistan

Abstract

The explanation of the potential sources of economic fluctuations is a key research domain in macroeconomics. The purpose of the study is to identify the potential factors that impose permanent and transitory shocks to the economy. We analyzed the macroeconomic fluctuations by decomposing time series of real gross domestic production (GDP) growth of Pakistan into the longrun trend and business cycles. The turning points chronology of business cycles is identified by using both HP filter and Markow regime switching model over 1951-2015. Second, the study explored the relationship between components of real GDP growth with macroeconomic variables by using Autoregressive Distributive Lag (ARDL) bound testing approach. It is found that the balance of trade and external debt played are primary drivers of business cycle fluctuations. However, trend components require GDP deflator and FDI additionally for a meaningful explanation. The results of the study would benefit policymakers by unraveling the characteristics of business cycles.

Keywords

• business cycles
• macroeconomy
• HP-filter
• MS-model
• bound test