Fiscal Policy Analysis of Pakistan: a Structural Vector Autoregression Analysis

Abstract

This paper is based on the analysis of impact of fiscal policy indicators on the economy of Pakistan. The analysis is conducted by incorporating the debt feedback in analyzing fiscal policy shocks and using structural vector autoregression (SVAR) model. The findings of the study are mainly focused on estimating the impact of government expenditure and tax shock on the macroeconomic conditions in Pakistan, while keeping the intertemporal budget constraint in consideration. The results of the study reveal that government expenditure has a positive impact on output and growth in the country, however this also generates inflationary pressure. On contrary, tax shock has a negative impact on output and insignificant impact on inflation. The study further emphasizes that in the developing countries like Pakistan, fiscal policy should be designed keeping in view the debt dynamics of the country, that is also essential for economic growth and fiscal sustainability of the country.