Calibrating a DSGE model to analyze investment shocks' impact on Pakistani bond prices and output (2013)
Undergraduate: Nayab Khan
Faculty Advisor: Michael Aguilar
Department: Economics
The withdrawal of foreign direct investment has been one of the largest factors hindering the development of numerous emerging market economies like Pakistan over the past several decades. Since 1998, Pakistan has endured several shocks to foreign direct investment due to sociopolitical unrest, fears of nuclear war between Pakistan and India and a general withdrawal of FDI. Building upon a recent theoretical finding in the literature, the present paper calibrates a small, closed economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan, motivated by Real Business Cycle principles, in order to investigate the impact of investment shocks on output fluctuations. This paper contributes to the currently limited literature on Pakistan, as it expands the standard budget constraint used in macroeconomic literature to include the financial sector, which links the financial markets with the macro-economy. The inclusion of the financial markets reveals a potential link between increased security concerns, shocks to investment in the macro-economy, and elevated yields for Pakistani Investment Bonds (PIB)._x000D_
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