Research & Presentations

PUBLICATION

Engin Kara & Ahmed Pirzada, 2020. "A Possible Explanation Of The Missing Deflation Puzzle," Economic Inquiry, Western Economic Association International, vol. 58(1), pages 361-373, January.

- working paper version: A Possible Explanation of the Missing Deflation Puzzle, Bristol Economics Discussion Papers 16/670.

WORKING PAPERS

Liberalisation Reforms and Misallocation: The Role of Political Institutions, 2024.

Abstract: To what extent did the liberalisation policies of the 1990s and 2000s help address the misallocation of factors across sectors in developing countries? This paper shows that while misallocation decreased during this period - particularly in countries with higher levels of misallocation in 1990 - this improvement cannot be explained by the liberalisation reforms implemented by respective governments. However, a more nuanced picture emerges for trade liberalisation. In countries which were sufficiently democratic, an increase in trade liberalisation decreased misallocation. This evidence also helps reconcile conflicting views on the success of liberalisation reforms by highlighting the importance of right political institutions for their success.

Inflation Under Incomplete Markets, for Annual Conference on the Management of Pakistan's Economy, Lahore School of Economics, 2024.

Abstract: Why did inflation in Pakistan increase from 13.8% in May 2022 to the peak of 38% in May 2023? Similar surges in inflation are also observed across other developing economies at times of financial stress. This short paper presents a small open economy model where current and expected future risk affects both domestic and CPI inflation. This is due to the assumption of incomplete markets which gives rise to deviations in the uncovered interest rate parity (UIP) condition, also known as excess returns or risk premium. I use the model to show that the surge in inflation in Pakistan was due to the sharp increase in risk premium and not due to other factors often discussed in popular discourse such as cost shocks, differential in policy rates, inflation expectations, and money supply.

Pakistan and the rest: A tale of dismal productivity growth, misallocation, and missing transformation (with Aadil Nakhoda, Saihan Mohammad, Sarah Javaid), Bristol Economics Discussion Papers 24/778, 2024.

Abstract: We leverage newly available datasets to study key factors which explain why Pakistan has seen limited transformation in recent decades. First, we show that one of the reasons for this is low productivity growth. Average labour productivity growth due to within sector improvements equals only 0.73% between 1990 - 2018. This is explained by decreasing capital-output ratio. In sharp contrast, factor inputs only explain 6.22% of variation in labour productivity in Pakistan. Second, while we show that the extent of misallocation across the economy has decreased over time, there is significant misallocation between the agriculture and the non-agriculture sectors. Finally, we explore the extent to which GVC linkages can facilitate the transformation process by decreasing misallocation and increasing productivity. Throughout the paper, we also highlight trends in other developing countries. 

Unravelling the Impact of Higher Uncertainty on Profits and Inflation (with Engin Kara), CESifo Working Paper Series 10587, 2023.

Abstract: This paper aims to explore the impact of rising uncertainty on prices using micro-data on prices and multi-sector new Keynesian models. We identify diverse price responses to increasing macroeconomic uncertainty: goods with relatively flexible prices experience a decline due to lower demand caused by the rising uncertainty, while those with sticky prices experience an increase. The model suggests that economic uncertainty creates strategic complementarity for firms with sticky prices, prompting them to raise mark-ups and prices in anticipation of potentially higher future inflation. These findings establish a connection between heightened uncertainty, higher core inflation, and increased profits. 

Older version - Evaluating effectiveness of price level targeting in the presence of increasing uncertainty (with Engin Kara), Bristol Economics Discussion Papers 21/737, School of Economics, University of Bristol, UK.

Non-linear effects of oil shocks on stock prices (with Haroon Mumtaz and Konstantinos Theodoridis), School of Economics and Finance, QMUL, Working Paper 865, 2018. 

Abstract: This paper uses a panel Threshold VAR model to estimate the regime-dependent impact of oil shocks on stock prices. We find that an adverse oil supply shock has a negative effect on stock prices when oil inflation is low. In contrast, this impact is negligible in the regime characterised by higher oil price inflation. Using a simple DSGE model, we suggest that the explanation for this result may be tied to the behaviour of credit spreads. When oil inflation is low, lower policy rates encourage firms to get highly leveraged. A negative oil shock in this scenario leads to a substantial increase in spreads, reducing profits and equity prices. In contrast, at higher rates of inflation, spreads are less affected by the oil shock, ameliorating the impact on the stock market.

Energy Price Uncertainty and Decreasing Pass-through to Core Inflation, Bristol Economics Discussion Papers 17/681, 2017.

Abstract: This paper uses an extended version of the New Keynesian model to provide an alternate explanation for the decrease in energy price pass-through to core inflation. Results show that in a model with households' consumption of energy goods, uncertain energy prices decrease .firms' responsiveness to an energy price shock. This is due to the upward pricing bias channel in .firms' pricing decision. Since prices are sticky, .firms bias their prices upwards. The pricing bias provides cushion to .firms against future cost shocks. Increase in energy price uncertainty further increases the magnitude of the bias. As a result, when a positive energy price shock hits the economy, .firms require a smaller increase in their prices than they would have in absence of the pricing bias.

Price Stickiness and Intermediate Materials Prices, Bristol Economics Discussion Papers 17/686, 2017

Abstract: The standard New Keynesian model requires large degree of price stickiness to match observed inflation dynamics. This is contrary to micro-evidence on prices. This paper addresses this criticism of the standard model. Firstly, the price mark-up shock is replaced with a sector-specific intermediate input-price shock. Secondly, survey data on long-term inflation expectations are also used when estimating the new model. Estimation results show that marginal costs in the model with intermediate materials are stable unlike in the model without. As a result, the new model does not require a large degree of price stickiness to match marginal costs and observed inflation. The model is estimated for both the US and the Euro area, thus showing that this result is not specific to the US only.

REPORTS

New Vision for Economic Transformation, Economic Advisory Group, November 2020. Co-Author.

Framework for Economic Growth: Pakistan. Planning Commission, Government of Pakistan, May 2011. Co-Author.

Rethinking Connectivity as Interactivity: Role of Networks. Planning Commission, Government of Pakistan, February 2012. Co-Author.