IDEAS home Printed from https://ideas.repec.org/a/pid/journl/v49y2010i4p497-512.html
   My bibliography  Save this article

The Effects of Fiscal Policy on Economic Growth: Empirical Evidences Based on Time Series Data from Pakistan

Author

Listed:
  • Shahid Ali

    (University of Swat, Khyber Pakhtunkhwa)

  • Naved Ahmad

    (Department of Economics and Finance, Institute of Business Administration (IBA), Karachi)

Abstract

This study investigates the effectiveness of fiscal policy and its impact on macroeconomic activities in Pakistan during the period 1972–2008. It examines the role of fiscal policy under democratic and military regimes. Recognising the shortcomings of traditional procedures, this study adopts modern econometric techniques to identify the effects of fiscal policy on macroeconomic activities. The sensitivity analysis procedure has been carried out to select the robust variables, which are not sensitive to different econometric techniques. Dynamic simulations have also been performed to observe the reaction of unexpected structural and policy shocks. Using Auto Regressive Distribute Lag (ARDL) model, we find that the overall fiscal deficit exerts a negative effect on economic growth in the long run. Hence, this study concludes that expansionary fiscal contraction occurs in Pakistan. In order to estimate short-run dynamics, we use the Error Correction Mechanism (ECM). In the short run, the overall fiscal deficit has a significant impact on economic growth. The study recommends that the budget deficit should be in the narrow band of 3 to 4 percent of GDP. Beyond this limit, the unsustainable budget deficit could have undesirable macroeconomic costs and the government’s macroeconomic objectives such as low inflation and high economic growth might be in jeopardy. The government should also curtail non-productive expenditures. Particular attention should be given to the Public Sector Development Plan (PSDP), as it is the complementary of private investment and has a long-term impact on macroeconomic activities.

Suggested Citation

  • Shahid Ali & Naved Ahmad, 2010. "The Effects of Fiscal Policy on Economic Growth: Empirical Evidences Based on Time Series Data from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 497-512.
  • Handle: RePEc:pid:journl:v:49:y:2010:i:4:p:497-512
    as

    Download full text from publisher

    File URL: http://www.pide.org.pk/pdf/PDR/2010/Volume4/497-512.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    2. Vito Tanzi & Howell H. Zee, 1997. "Fiscal Policy and Long-Run Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 179-209, June.
    3. Muthi Samudram & Mahendhiran Nair & Santha Vaithilingam, 2009. "Keynes and Wagner on government expenditures and economic development: the case of a developing economy," Empirical Economics, Springer, vol. 36(3), pages 697-712, June.
    4. Easterly, William & Schmidt-Hebbel, Klaus, 1993. "Fiscal Deficits and Macroeconomic Performance in Developing Countries," World Bank Research Observer, World Bank Group, vol. 8(2), pages 211-237, July.
    5. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-348, August.
    6. Iris Claus & Aaron Gill & Boram Lee & Nathan McLellan, 2006. "An empirical investigation of fiscal policy in New Zealand," Treasury Working Paper Series 06/08, New Zealand Treasury.
    7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    8. Tenhofen Jörn & Wolff Guntram B. & Heppke-Falk Kirsten H., 2010. "The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 230(3), pages 328-355, June.
    9. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers.
    10. Roberto Perotti, 2005. "Estimating the effects of fiscal policy in OECD countries," Proceedings, Federal Reserve Bank of San Francisco.
    11. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    12. Ahmad, Imtiaz & Qayyum, Abdul, 2008. "Effect of Government Spending and Macro-Economic Uncertainty on Private Investment in Services Sector: Evidence from Pakistan," MPRA Paper 11673, University Library of Munich, Germany.
    13. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-183, May.
    14. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    15. Gale, William G. & Orszag, Peter R., 2003. "Economic Effects of Sustained Budget Deficits," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 463-485, September.
    16. Muthi Samudram & Mahendhiran Nair & Santha Vaithilingam, 2009. "Keynes and Wagner on government expenditures and economic development: the case of a developing economy," Empirical Economics, Springer, vol. 36(3), pages 713-713, June.
    17. Niloy Bose & M. Emranul Haque & Denise R. Osborn, 2007. "Public Expenditure And Economic Growth: A Disaggregated Analysis For Developing Countries," Manchester School, University of Manchester, vol. 75(5), pages 533-556, September.
    18. Romero-Ávila, Diego & Strauch, Rolf, 2008. "Public finances and long-term growth in Europe: Evidence from a panel data analysis," European Journal of Political Economy, Elsevier, vol. 24(1), pages 172-191, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Şen, Hüseyin & Kaya, Ayşe, 2015. "Growth enhancing effect of discretionary fiscal policy shocks: Keynesian, Weak Keynesian or Non-Keynesian?," MPRA Paper 65976, University Library of Munich, Germany, revised 05 Aug 2015.
    2. Ghulam Rasool Madni, 2014. "Taxation, Fiscal Deficit and Inflation in Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(53), pages 41-60, September.
    3. repec:lje:journl:v:22:y:2017:i:sp:p:53-72 is not listed on IDEAS
    4. Şen, Hüseyin & Kaya, Ayşe, 2015. "The relative effectiveness of Monetary and Fiscal Policies on growth: what does long-run SVAR model tell us?," MPRA Paper 65903, University Library of Munich, Germany, revised 01 Aug 2015.
    5. Ghulam Rasool Madni, 2013. "Instrumental Effects of Fiscal Policy for Pakistan Economy," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 16(50), pages 27-50, December.
    6. Ghulam Rasool Madni, 2014. "Role of fiscal policy for private investment in Pakistan," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 7(2), pages 139-152, September.
    7. Riaz, Nimra & Munir, Kashif, 2016. "Fiscal Policy and Macroeconomic Stability in South Asian Countries," MPRA Paper 74247, University Library of Munich, Germany.

    More about this item

    Keywords

    Fiscal Policy; Economic Growth; ARDL;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:49:y:2010:i:4:p:497-512. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Khurram Iqbal). General contact details of provider: http://edirc.repec.org/data/pideipk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.