Shadow Pricing and Macroeconomic Analysis: Some Illustrations from Pakistan

Abstract

Shadow prices are being used increasingly in the economic analysis of projects. The purpose of this paper, however, is to argue that shadow prices are equally relevant for certain types of analysis at the macro-economic level. In theory, macroeconomic issues can be properly analyzed, if at all, only in general equilibrium frame• work. Quantification then requires the solution of an appropriate model. But, estimable general equilibrium models can seldom include many variables, and the level of aggregation must remain high. They are general only in the very partial sense of simultaneous solution of a limited set of aggregated endogenous variables. On the other hand, some of the issues addressed by shadow pricing involve quite disaggregated variables, and, of course, project analysis itself often requires very detailed estimations.