Short and Long Run Determinants of the Private Investment in Pakistan: A Co-Integrated Analysis

The core intention of this study is to analyze the key hurdles by finding the long and short run determinants of private investment in Pakistan. Time Series Data for period 1988 to 2018 of 30 year was used. To check unit root of all data series “Augmented Dickey Fuller test” (ADFT) was implied. Data series were found stationary at first difference I (1) and non-stationary at level I (0). Johansen co-integration test is used to verify long run association. Co-integrating (OLS) was used for demonstration of long run relationship. However, to capture short run dynamics Error Correction Model (ECM) was used. In long run private investment has a positive and significant relationship with GDP and public investment while interest rate has an inverse and significant relationship with private investment; Foreign Direct Investment and Defense expenditure have a positive and significant relationship with Private investment. The co-efficient of dummy shows the increases in investment after the incidence of 9/11. Which reject the hypothesis of this study that 9/11 has negative impact on the local private investment. While in short run, Gross Domestic Product has a direct relationship between private investments while interest rate has an inverse relation with private investment. The ECM factor’s value is -0.19 which show that 19 % of the short run error is corrected every year toward the long run equilibrium relationship. This study suggests that Government should increase investment of infrastructure and also create a conducive environment for business.