Causality Tests and the Relative Effectiveness of Monetary and Fiscal Policies in Pakistan

Muhammad Hussain


The Granger and the Sims causality tests as applied to annual
data from Pakistan for the period 1971-72 to 1989-90, help us in
arriving at identical conclusions even though in the former test growth
rates of the relevant variables were used and in the latter natural
logged and filtered variables were used. Both tests detected
unidirectional causality running from monetary variables (monetary base
and money stock) to nominal GNP in Pakistan for the period under study.
Both tests also suggest that there is unidirectional causality running
from nominal GNP to the total government expenditure in Pakistan for the
period under study. The findings of the study suggest that changes in
monetary variables do exert their influence on economic activity,
represented by the nominal GNP, in Pakistan. The results of the study
also provide some evidence that changes in total government expenditure
rather than causing changes in the nominal GNP in Pakistan, are rather
influenced by the changes in the nominal GNP. Thus, the findings of the
study suggest that the monetary policy was relatively more effective
than the fiscal policy in influencing the nominal GNP in Pakistan,
during the period under study.

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