The Dynamic Effects of Fiscal Policy Shocks in Pakistan

This study investigates the dynamic effects of fiscal policy shocks in Pakistan by using structural vector auto-regressive (SVAR) model for annual time series data from 1972 to 2014. To identify the effects of fiscal shocks on macro economy, four different identification approaches has been used i.e. Recursive approach, Blanchard and Perotti approach, Sign Restriction and Event Study approach for two different lags. Both sets of impulse responses gives the same results and support Mountford and Uhlig (2005) that different lag order has no effects on the whole results. While the impulse responses of all identification approaches give different results criticized Caldara and Kamps (2006) that different identification methods given the same results. The most common results provided both government expenditure and revenue shocks showed that an expansionary fiscal policy increased output only for short and medium term at the cost of high prices and have no significant effects in the long run.