Factors affecting the services sector growth in Pakistan: A time varying parametric approach

Abstract

Abstract. This empirical study followed time varying parametric approach (Kalman Filter) to find out relevant determinants of Pakistan’s services sector’s growth. To our best of knowledge, no author has made such study that could collect a number of variables from existing empirical literature and capture the impact of structural changes on relevant determinants of services sector growth in Pakistan while employing Kalman Filtering approach. Current study bridges this gap. Annual data was taken from World Development Indicators (2014) during period 1976-2014. Main findings of the study are that rolling regression estimates of explanatory variables justify the use of Kalman filtering approach. The state space Results show that foreign direct investment and gross national expenditures are positive and significant determinants of services sector growth while inflation, domestic credit to private sector, gross fixed capital formation, and remittances received and trade openness have negative impact on services sector growth. One step ahead graph inflation, domestic credit to private sector, foreign direct investment, gross national expenditures, gross fixed capital formation, remittances received and trade openness indicate that model estimated was stable as critical bounds(dotted line) in graph 2 are not crossed by central line. Based on empirical findings, it is recommended the concerned authorities to augment gross national expenditures and foreign direct investment to achieve long run services sector growth for better economic growth in country.

Keywords. Services sector, Kalman filter, Rolling regression, Inflation, Foreign direct investment.

JEL. F21, F40, N57, O13.