Modeling debt accumulation in Pakistan: A system dynamics approach

Abstract

Based on generally accepted macroeconomic framework and using System Dynamics method we identify and model the fundamental structure of public debt accumulation process in Pakistan and its two way linkages with economic growth and public finances. Our objective is to identify leverage points that may be utilized to slow down debt accumulation process without slowing down economic growth. For this purpose we consider fiscal policy as the strategic element of the debt accumulation process and assume that there exists an effective monetary policy that satisfies the objectives of the fiscal policy. We demonstrate that better debt management will only be possible through exogenous debt relief along with a simultaneous endogenous government responsibility to maintain fiscal discipline and private sector responsibility to generate growth.