Exploring The Relationship Between Financial, Macroeconomic Uncertainty And Business Cycles: A Case Of Pakistan Using Mediation And Moderation Analysis
The present study is aimed to explore the relationship between business cycle fluctuations and financial, macroeconomic uncertainty in Pakistan economy using yearly time series data from 1998 to 2017. The mediation and moderation analysis are used to derive channels with which outcome variable is affected as a response to independent variable and based on that a theoretical relationship is established between the variables in the consideration. This technique is a-theoretical itself and is used to develop theoretical relationship between variables that are having mix evidence of affecting each other. The objective of this study is to find out how or why business cycle is affected by macroeconomic or financial uncertainty and to use a different approach which addresses the causal relationships. Theories on the business cycles have not clarified whether uncertainty is the outcome or cause of business cycles? And which kind of uncertainty causes business cycles. This study found that in Pakistan the relationship between business cycles and macroeconomic uncertainty is mediated by financial uncertainty. Similarly, the relationship between financial uncertainty and business cycles is also mediated by macroeconomic uncertainty. Implying that, separately financial or macroeconomic uncertainty is statistically insignificant in affecting business cycles. In other words, macroeconomic uncertainty affect business cycles through its impact on financial uncertainty or financial uncertainty affect business cycles through its impact on macroeconomic uncertainty. The direction of relationship between financial uncertainty, macroeconomic uncertainty and business cycle fluctuations is not affected by adding a third variable as interaction of uncertainties i.e. macroeconomic uncertainty and financial uncertainty. The moderation relationship is found to be insignificant from financial uncertainty and macroeconomic uncertainty on business cycles in Pakistan economy. Supervisor:- Dr. Hafsa Hina
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