Revisiting the determinants of Economic Growth: An Implication Regime Switching model in case of Pakistan

Abstract

In the current study, relevant determinants of economic growth in Pakistan were examined from 1981 to 2020. The results of the BDS non-linearity test corroborate the non-linearity of the data, and the Markov regime-switching model is applied. In both regimes, the real effective exchange rate (RER), inflation (CPI), and potential output gap have a positive impact on economic growth, whereas openness has a negative impact. Furthermore, in high growth regimes, interest rates (CMR) have a positive relationship with economic growth, but in low growth regimes, they have a negative relationship. Based on the study's empirical findings, it is advised that policymakers examine the nonlinear nature of macroeconomics. This will aid in the formulation of better policiesfor economic growth. Further, it is recommended that policymakers take measures to reduce the heat of the economy through demand management policy. This policy may hurt other sectors of the economy negatively which does not contribute to heating the economy.