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An analysis of the asymmetric effect of fiscal policy on economic growth in Pakistan: Insights from Non-Linear ARDL

Author

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  • Ibrar Hussain

    (University of Malakand-Pakistan)

  • Muhammad Rafiq

    (Institute of Management Sciences Peshawar-Pakistan)

  • Zahoor Khan

    (Institute of Management Sciences Peshawar-Pakistan)

Abstract

This study investigates the dynamic asymmetric effect of fiscal deficit on growth in Pakistan using the Non-Linear ARDL technique. We employ the Mankiw et al (1992) model on annual time series data from 1976 to 2017 and find co-integration relationship between growth and cyclically adjusted primary fiscal deficit along with other variables. More generally the study seeks to empirically test the asymmetric effect that fiscal deficit has on economic growth in Pakistan. The results reveal the negative effect of expansionary fiscal policy on economic growth. From the tests of asymmetry, we find asymmetric effect of overall fiscal deficit in the short-run only, while there is no such asymmetry in the long-run. The asymmetric analysis of fiscal deficit at disaggregated levels evidences only short-run impact asymmetry in case of public spending, while both the long run and short-run asymmetries are found in the case of public revenue. The analysis reveals that tax-based consolidation is likely to be more expansionary than spending-based adjustment in the long-run.

Suggested Citation

  • Ibrar Hussain & Muhammad Rafiq & Zahoor Khan, 2020. "An analysis of the asymmetric effect of fiscal policy on economic growth in Pakistan: Insights from Non-Linear ARDL," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 15(1), pages 19-49, January-J.
    • Handle: RePEc:aho:journl:v:15:y:2020:i:1:p:19-49
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    References listed on IDEAS

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    1. Ibrar Hussain & Jawad Hussain & Arshad Ali & Shabir Ahmad, 2021. "A Dynamic Analysis of the Impact of Fiscal Adjustment on Economic Growth: Evidence From Pakistan," SAGE Open, , vol. 11(2), pages 21582440211, June.

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