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The Stock Market and the Economy in Pakistan

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The Stock Market and the Economy in Pakistan
MP A R
Munich Personal RePEc Archive

The Stock Market and the Economy in Pakistan
Fazal Husain and Tariq Mahmood
Pakistan Institute of Development Economics

2001

Online at http://mpra.ub.uni-muenchen.de/4215/ MPRA Paper No. 4215, posted 24. July 2007

The Pakistan Development Review 40 : 2 (Summer 2001) pp. 107–114

The Stock Market and the Economy in Pakistan
FAZAL HUSAIN and TARIQ MAHMOOD
This paper re-examines the causal relationship between stock prices and macro variables like consumption expenditure, investment spending, and economic activity (measured by GDP) in Pakistan. Using annual data from 1959-60 to 1998-99 and applying cointegration and error correction analysis, the paper indicates the presence of long-run relationship between stock prices and macro variables. Regarding the cause and effect relationship, the analysis indicates a one-way causation from macro variables to stock prices, implying that in Pakistan fluctuations in macro variables cause changes in stock prices. The findings suggest that the stock market in Pakistan is not that developed to play its due role in influencing aggregate demand. A disturbing feature of the stock market in Pakistan is that it cannot be characterised as the leading indicator of economic activity. In the absence of other strong indicators, shooting up of stock prices may indicate a speculative bubble.

I. INTRODUCTION The stock market plays an important role in the economy by mobilising domestic resources and channelling them to productive investment. This implies that it must have a significant relationship with the economy. The relationship can be seen, in general, in two ways. The first relationship views the stock market as the leading indicator of the economic activity in the country, whereas the second focuses on the possible impact the stock market may have on aggregate demand, particularly through aggregate consumption and investment. In other words, whether changes in stock market cause


References: Ahmed, M. F. (1999) Stock Market, Macroeconomic Variables, and Causality: The Bangladesh Case. Savings and Development 23:2, 109–129. Ando, A., and F. Modigliani (1963) The Life Cycle Hypothesis of Saving: Aggregate Implications and Tests. American Economic Review 53:1, 55–84. Bosworth, B. (1975) The Stock Market and the Economy. Brookings Papers on Economic Activity 2, 257–300. Engle, R., and C. Granger (1987) Cointegration and Error Correction: Representation, Estimation, and Testing. Econometrica 55:2, 251–276. Mookerjee, R. (1988) The Stock Market and the Economy: The Indian Experience 1949–81. Indian Economic Journal 36:2, 30–43. Nishat, M., and M. Saghir (1991) The Stock Market and Pakistan Economy. Savings and Development 15:2, 131–145. Pakistan, Government of (1998) 50 Years of Pakistan in Statistics. Islamabad: Federal Bureau of Statistics. Pakistan, Government of (Various Issues) Economic Survey. Islamabad: Ministry of Finance. Pakistan, Government of (Various Issues) Annual Report. Karachi: State Bank of Pakistan. Tobin, J. (1969) A General Equilibrium Approach to Monetary Theory. Journal of Money Credit and Banking 1:1, 15–29.
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