Macroeconomic Forecasting of Pakistan’s Major Trading Partners: An Application of GVAR Model

Abstract

In this study, an attempt has been made to analyze and estimate the macroeconomic forecasting for Pakistan and its major twelve trading partners for the period of 1995Q1 to 2012Q4, using Global Vector Autoregressive (GVAR) Model. The key feature of GVAR model is to capture the independence and co-movement across countries. Secondly, it provides better forecasting performance. The GVAR model is estimated for twelve trading economies. During estimation, Pakistan economy is treated as single and domestic economy, whereas the other trading partners are treated as foreign economies. The important findings of this study are that the GVAR forecasts better than the VAR forecasts in most of the cases. Second, the foreign real GDP and foreign inflation rates are reflecting the significant impact of their domestic counterparts of Pakistan real GDP and inflation