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Testing Fiscal Dominance Hypothesis in a Structural VAR Specification for Pakistan

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  • Shaheen Rozina

    (Effat University, Jeddah, Saudi Arabia)

Abstract

This research aims to test the fiscal dominance hypothesis for Pakistan through a bivariate structural vector auto regression (SVAR) specification, covering time period 1977 – 2016. This study employs real primary deficit (non interest government expenditures minus total revenues) and real primary liabilities (sum of monetary base and domestic public debt) as indicators of fiscal measures and monetary policy respectively. A structural VAR is retrieved both for entire sample period and four sub periods (1977 – 1986, 1987 – 1997, 1998 – 2008, and 2009 – 2016). This study identifies the presence of fiscal dominance for the entire sample period and the sub period from 1987 – 2008. The estimates reveal an interesting phenomenon that fiscal dominance is significant in the elected regimes and weaker in the presence of military regimes in Pakistan. From a policy perspective, this research suggests increased autonomy of central bank to achieve long term price stability and reduced administration costs to ensure efficient democratic regime in Pakistan.

Suggested Citation

  • Shaheen Rozina, 2018. "Testing Fiscal Dominance Hypothesis in a Structural VAR Specification for Pakistan," Scientific Annals of Economics and Business, Sciendo, vol. 65(1), pages 51-63, March.
    • Handle: RePEc:vrs:aicuec:v:65:y:2018:i:1:p:51-63:n:3
    DOI: 10.2478/saeb-2018-0003
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    Keywords

    fiscal dominance; SVAR; primary deficit; primary liabilities; Pakistan;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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