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Role of fiscal policy for private investment in Pakistan

Author

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  • Ghulam Rasool Madni

    (Department of Economics at "The University of Lahore" Lahore, Pakistan)

Abstract

Fiscal policy has much controversial debate regarding its effectiveness on private investment. Taxation and government expenditure are two main instruments of fiscal policy. This paper is aimed to analyze the effect of fiscal deficit and other variables on private investment of Pakistan. The data time span for this study is 1979-2012. After finding the integration order of all variables by Augmented Dicky Fuller Test, the impact of variables is analyzed by utilizing the Auto Regressive Distributed Lag approach of Cointegration which is a better estimation technique for small sample size. Error Correction Model is applied for short run dynamics. The results reveal that fiscal deficit, rate of interest, inflation and external debt are affecting negatively the private investment in Pakistan while exchange rate and exports have a positive impact on private investment.

Suggested Citation

  • 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.
  • Handle: RePEc:tei:journl:v:7:y:2014:i:2:p:139-152
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    References listed on IDEAS

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    1. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Understanding the Effects of a Shock to Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 166-206, January.
    2. Bahmani-Oskooee, Mohsen, 1999. "Do Federal Budget Deficits Crowd Out or Crowd In Private Investment?," Journal of Policy Modeling, Elsevier, vol. 21(5), pages 633-640, September.
    3. Baldacci, Emanuele & Hillman, Arye L. & Kojo, Naoko C., 2004. "Growth, governance, and fiscal policy transmission channels in low-income countries," European Journal of Political Economy, Elsevier, vol. 20(3), pages 517-549, September.
    4. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2002. "Fiscal Policy, Profits, and Investment," American Economic Review, American Economic Association, vol. 92(3), pages 571-589, June.
    5. Beck, Stacie E., 1993. "The Ricardian equivalence proposition: evidence from foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 154-169, April.
    6. 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.
    7. Solimano, Andres, 1992. "Understanding the investment cycle in adjustment programs : evidence from reforming economies," Policy Research Working Paper Series 912, The World Bank.
    8. 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.
    9. Kalim Hyder, 2001. "Crowding-out Hypothesis in a Vector Error Correction Framework: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 40(4), pages 633-650.
    10. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    11. repec:hrv:faseco:3353756 is not listed on IDEAS
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    More about this item

    Keywords

    Fiscal Policy; Private Investment; co integration;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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