Dynamic Effects of Changes in Government Spending in Pakistan’s Economy.

Attiya Yasmin Javid , Umaima Arif

Abstract


This study analyses the effects of changes in government
spending on aggregate economic activity and the way these effects are
transmitted in case of Pakistan for the period 1971-2008. To analyse the
transmission mechanism of government spending innovations, the Vector
Autoregressive Model is estimated for following five variables:
government spending per capita, GDP per capita, consumption per capita,
debt to GDP ratio, long term interest rate and real exchange rate. The
consumption and output respond negatively to the innovation in
government spending which is consistent with the standard neoclassical
model. The interest rates increase in the face of expansionary fiscal
spending. As government debt builds up with fiscal expansion, the rising
risk of default or increasing inflation risk reinforce crowding out
through interest rates. The real exchange rate tends to appreciate in
response to rise in government spending. This finding is according to
the open economy literature and also with the conventional literature.
JEL classification: E21, E62, E63 Keywords: Government Spending, Vector
Autoregressive Model, Impulse Response Function, Neoclassical
Model

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DOI: https://doi.org/10.30541/v48i4IIpp.973-988

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