Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Pakistan: A Disaggregated SVAR Analysis

This paper analyzes the effects of fiscal policy shocks on a set of macroeconomic variables in Pakistan. The study adopts the SVAR framework and uses quarterly data of Pakistan from 1976:Q1 to 2018:Q4. Fiscal policy shocks are identified by incorporating the elasticity of fiscal variables as well as by taking decision lags in policy formulation to economic activity. The results showed that an increase in government developmental expenditure increases real GDP more than current expenditure, while current expenditure increases prices and developmental expenditure reduces prices. Prices are positively related with subsidies and defence expenditure, while negatively related with expenditure on social services. Tax revenue increases real GDP more than non-tax revenue, while tax revenue and non-tax revenue are both positively related with prices and negatively related with interest rate. An increase in direct tax has positive impact on prices and interest rate and negatively related with real GDP, while indirect tax is positively related with real GDP and negatively related with interest rate. Prices are positively related with excise duty, sales tax, and tax on international trade. Results support the Keynesian view that fiscal policy is a beneficial mechanism to stabilize the economy and stimulate economic activity at the cost of inflation. Government has to channelize the expenditures into productive means, while adopt the strict policy of accountability for the generation and collection of revenue to lead the economy on the path of prosperity.