The RBC View of Pakistan: A Declaration of Stylized Facts and Essential Models

In this paper, we establish the nature of short-run fluctuations of the Pakistani economy over the period of 1981-2010. There have been significant changes in the nature of the Pakistani economy over the last few decades. Therefore, we focus our detailed analysis on the last few decades where it seems more appropriate to investigate the nature and causes of business cycles in Pakistan. Furthermore, we evaluate the performance of a typical RBC and an augmented RBC model with an exogenous FDI shock in explaining cyclical fluctuations experienced by the Pakistani economy. We find that a simple RBC model performs poorly in terms of matching relevant second- order moments of short run fluctuations as depicted by the data. However, augmented RBC model performs better compared to the simple RBC model.