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Fiscal policy transmission mechanism in Pakistan: A general equilibrium analysis

Author

Listed:
  • Muhammad Raashid

    (Muhammad Raashid Pir Mehr Ali Shah Arid Agriculture University, Rawalpindi-Pakistan)

  • Abdul Saboor

    (Pir Mehr Ali Shah Arid Agriculture University, Rawalpindi-Pakistan)

  • Shahzad Ahmad

    (State Bank of Pakistan and Institute of Business Administration, Karachi-Pakistan)

Abstract

This paper explores the impact of fiscal spending on key macroeconomic indicators for Pakistan economy using an estimated open economy new Keynesian dynamic stochastic general equilibrium (DSGE) model. Results show that a positive shock to government consumption leads to fall in private consumption, private investment and exports owing to negative wealth effect, rise in interest rate and domestic currency appreciation, respectively. Imports and inflation also rise. Estimated values of present value fiscal multipliers are 0.54, 0.29 and 0.18 after 1 year, 5 years and 10 years, respectively. These results show that although positive in the short run, yet the magnitude of the fiscal multiplier is very low in the case of Pakistan. Sensitivity analysis shows that the value of the multiplier marginally rises with rise in degree of price stickiness. Transitory shocks have a substantially higher multiplier relative to persistent shocks.

Suggested Citation

  • Muhammad Raashid & Abdul Saboor & Shahzad Ahmad, 2020. "Fiscal policy transmission mechanism in Pakistan: A general equilibrium analysis," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 15(1), pages 50-66, January-J.
    • Handle: RePEc:aho:journl:v:15:y:2020:i:1:p:50-66
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    Cited by:

    1. Abdul Jalil, 2021. "Austerity: Which Way Now?," PIDE Knowledge Brief 2021:21, Pakistan Institute of Development Economics.

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