Download ECONOMIC MANAGEMENT MODELING IN THE ECO REGION

Research Proposal
PIDE and Iran

Prudent economic management is essential for putting the
economies on the path of sustainable economic growth.

Over the years, the economies of the ECO region have sought
to improve macroeconomic policies as reflected in trade
liberalization efforts, more flexible exchange rate regimes, and
lower fiscal deficits, which have combined to reduce
uncertainty and improve the overall investment environment.

The ECO countries are also pursuing privatization and
structural reforms

ECO’s commonalities indicate a big potential for cooperation
in these resource-rich economies

In this era of globalization, economic opportunities arising
from the global market can be better harnessed through
efficient economic management

Economic management leads to development in region which
is essential for standard of living.

Efficient economic management strategy must based on local
conditions and circumstances and priorities should be set with
longer-term perspective.

ECO countries must continue with their agenda of reforms and
institutional innovation in banking, capital markets, tax
system, and corporate sectors

Macroeconomic stability and economic growth could help
reduce poverty in conjunction with investment in social
sectors

Structural reforms are needed to strengthen policies and to
remove microeconomic distortions

Improved governance affects the quality of growth by
allowing realization of higher returns on investment and is
also conducive to poverty reduction



To deal with domestic macroeconomic imbalances, the
member states need strong commitment to sound fiscal
and monetary policies.
Prudent macroeconomic management of the economies
based on a rigorous and internally consistent
macroeconomic model may help the process of macro
policy formulation in the ECO member countries.
The foremost goal remains improvement in the quality
of life of people through stable and sustained economic
growth, which in turn depends on sound
macroeconomic policies.

To develop a macro-econometric model for the ECO
member countries that can provide rigorous analytical
platform for assessing the impact of macroeconomic
policies in the economy



Economic management is an important component of
a nation’s strategies for economic development and
subsequently a better standard of living
In this era of globalization, economic opportunities
arising from the global market can better be
harnessed through efficient economic management
Economic management modeling provides tools and
procedures through which this objective could be
realized.


Develop a dynamic macroeconomic model to study
the role of macroeconomic policies and identify the
dynamic adjustment process in the key economic
variables.
Specifically study would focus on macroeconometric models
because they depict the
structure as well as temporal behavior of the
macro-economy and provide implications of a
exogenous and policy shocks.

proposed models would be based on an open economy
framework and would take into account the features of
the ECO economies.

key components (i) production, (ii) aggregate demand
and expenditures, (iii) fiscal block, (iv) foreign trade
block, and (v) monetary and price.
Yt a  f ( Lat , CDta , Wt )
Where
Yt a = Agriculture value added
Lat = Labour engaged in agriculture
CDta = Credit disbursed to agriculture
Wt = Water availability.
(1)
Yt  f ( K , L )
m
m
t
m
t
(2)
Where Yt m = Manufacturing value added.
m
t
K = Capital stock employed in manufacturing
m
t
L = Labor employed in manufacturing
Yt  At  ( X t  M t )
(6)
Where A is domestic absorption refers to consumption ( C ), investment ( I ) and
government expenditures ( G ) respectively. Whereas, X and M denotes exports and
imports of goods and services respectively. The national income now is defined as:
Yt  Ct  I t  Gt  ( X t  M t )
This relationship always holds as an identity
(7)
Pt c  f (Yt d , rt d , RM t )
(8)
Where P c is real private consumption, Y d is real disposable income, r d is real
interest rate and RM is the real money balances ( M 2 definition). Following Haque
et al. (1990) we define real disposable income ( Y d ) as:
Yt d  (GDPt  DTXRt  INDTXRt  WREM t  CRPt ) / CPIt
(9)
Where DTXR denote direct tax revenues and INDTXR is indirect tax revenues.
WREM , CRP and CPI are worker’s remittances, credit to private sector and
consumer price index respectively. Worker’s remittances are included to capture the
effect of remittance on private consumption.

Time series data for the macroeconomic aggregates

Cointegration approach (Engle-Granger two-step procedure)
to estimate the model.

mean absolute percentage error (MAPE) and Theil’s inequality
coefficient (U )

a range of simulations of macroeconomic policy model to
assess issues such as the domestic and international
consequences of policies

workable set of macro-econometric models that can help the
process of macroeconomic management in the ECO member
countries.