Data and Methodology

VARIABLES

Our research will base on panel data, the poverty in the present study, for this purpose we are using

five variables whose data is collected from Economic Survey of Pakistan (various issues ), State

Bank of Pakistan and World Development Indicators. The present study is based on secondary

Time Series data collected from 1980 to 2011. So the total number of observation in this study is

32. The important variables which are undertaken for empirical analysis are

1. Population below the poverty line as (Head count Ratio) poverty estimate. ( POVERTY )

2. General government final consumption expenditure (current US$) as Government

Expenditure. ( GOVERNMENT EXPENDITURE )

3. Difference between Government revenue and Expenditure (% of GDP) as budget deficit

( BUDGET DEFICIT )

4. Official exchange rate (LCU per US$, period average) as variable exchange rate.

a. (EXCHANGE RATE)

5. Net official development assistance received (current US$) as development variable.

( DEVELOPMENT)

METHODOLOGY
The main objective of this study is to explore the link between poverty and macroeconomic

policies in Pakistan. This study uses annual time series data of Pakistan from 1980 to 2011.

In this study following tests are run to check the link between variables for the period of long run

and short run.

Unit Root Test

A stationary time series is one whose basic properties do not change over time, while a non

stationary variable has some sort of upward or downward trend. Most of the economic variables

exhibit a non stationary trend such as real such as real GDP or Unemployment rate etc. Most

formally, a time series variables Xt is stationary if

 The mean does not change over time.

 The variance is constant over time.

 The simple correlation coefficient between Xt and Xt-1 depends on the length of the lag (k)

but no other variable.

If variables are non stationary then it will inflate R2 and the t score, in this condition regression

known as spurious regression means the results become meaningless. If a time series has a unit

root (non stationary), the first difference of such time series will be stationary.

So firstly the unit root test is used in this study to examine the stationary of the data set. The

Augmented Dickey-Fuller (ADF) unit root test is used for this purpose. The ADF is based on

following regression:

∆𝑦t=α+βtt-1+δyt-1+∑𝑛𝑖=1 𝛾i∆𝑦t-1+εt
Where α is constant, t is a linear time trend, β, δ and γi are slope coefficients, εt is the error term.

The null hypothesis of non stationary series could be written as

H0:δ = 0

On the other hand, the one-sided alternative hypothesis of stationary series could be expressed by

H1: δ < 0

Cointegration Test

If two variables are cointegrated, then they have long term equilibrium relationship between them.

Johansen cointegration test will be used to test the long run movement of the variables. As Engle

and Granger (1987) pointed out, only variables with the same order of integration could be tested

for cointegration. Therefore, in the present research, both variables could be examined for

cointegration.

Only variables with the same order of integration can be tested for their cointegration. A standard

test -Johansen cointegration test- is used to check the long run movement of the variables. The test

is based on the maximum likelihood estimation of VAR.

∆𝑍𝑡 = 𝜇 + Ϝ1∆𝑍𝑡 − 1 + Ϝ2∆𝑍𝑡 − 2 + ⋯ Ϝ𝑘 + 1∆𝑍𝑡 − 𝑝 + 1 + 𝜋𝑍𝑡 − 1 + 𝜀𝑡

Where Zt is a k × 1 vector of stochastic variable, μ is a k × 1 vector of constant, εt is a k × 1vector

of error term, π and Ϝ1…Ϝk+1 are k × k matrices of parameters. On the other hand, if the

coefficient matrix π has reduced rank, r < k, then the matrix can be decomposed into π=αβ:

johenson cointegration test involves testing the rank of π matrix by examining whether the

eignvalues of π are significantly different from zero.

Causality

Causality will be tested by Granger causality methodology develops by Toda and Yamamoto

(1995). The advantage of using Toda and Yamamoto techniques of testing for Granger causality

has some great advantage. Toda and Yamamoto proposed a simple procedure requiring the

estimation of VAR, the MWald statics is valid regardless whether a time series is cointegration or

not. In this method we first set the optimal lag from VAR system then for Toda and Yamamoto

technique to check causality the optimal lag will be (k+1max) where d= maximum order of

cointegration while k= optimal lag determine by VAR.

The Wald statics will asymptotically distributed chi-square (X2), with degree of freedom equal to

the number of “zero restrictions”, irrespective of I(0),GI(1), or (2).

Ordinary Least Square Method

The ordinary least square method is one of the most popular and widely used method for regression

analysis. The method was developed by Carl Friedrich Gauss (1821) and has subsequently evolved

to become classical Linear Regression Model (CLRM). It is mainly to establish whether one

variable is dependent on another or a combination of other variables.

In the given model EMPG is male employment ratio, EPG is export of primary goods, INF is

inflation, GINV is gross investment and GDP is gross domestic product growth rate while U

represent the error term; and β1, β2, β3 and β4 represent the slop and coefficient of regression.

The coefficient of regression β2, β3, β4 indicates how a unit changes in the independent variables

(export of primary goods, inflation, gross investment and GDP growth) affect the dependent

variable (employment rate). The validity or strength of the ordinary least square method depends
on the accuracy of assumption. In order to estimate the regression model’ E-views is used the

procedure involves specifying the dependent and independent variables. E-views is run and from

the output the values of the constant, β1 (slop), coefficient of regression (β1, β2, β3, β4) and error

term U are obtained. In addition the output shows the t-statistic, probability value for the

coefficient for which results in either rejection or failure to reject the hypothesis at a specified level

of significance. Also the output shows the coefficient of determination (R-square), which measures

the proportion of the dependent variable that is explained by the regression model. The range for

that R-square varies between 0 and 1. As R-square approaches to 1, the more the independent

variables explain the variation in the dependent variable.

The Model

In this study the link between poverty, budget deficit, Government expenditure, Exchange rate and

Net official development are investigated by the following model

POV = β1+β2BD+β3GEX+β4ER+β5NOD

POV= Poverty head count ratio

BD = Budget Deficit

GEX = Government Expenditure

ER = Exchange Rate

NOD = Net Official Development