Shadow Pricingand Macroeconomic Analysis. Some Dlustrationsfrom Pakistan

Shadow prices are being used increasinglyin the economic analysisof projects. The purpose of this paper, however, is to argue that shadow prices are equally relevant for certain types of analysis at the macro-economic level. In theory, macroeconomic issues can be properly analyzed; if at all, only in general equilibriurn framework. Quantification then requires the solution of an appropriate model. But, estimable general equilibrium models can seldom include many variables,and the level of aggregation must remain high. They are general only in the very partial senseof simultaneous solution of a limited set of aggregated endogenous variables. On the other hand, some of the issuesaddressed by shadow pricinginvolve quite disaggregatedvariables, and, of course, project analysis itself often requires very detailed estimations.