Some Econometric Evidence on the Relative Importance of Monetary and Fiscal Policy in Pakistan

Najam Us Saqib, Attiya Yasmin

Abstract


Economists agree that both monetary and fiscal policies can
influence the pace of aggregate economic activity. However, their
relative importance still remains a widely debated and complicated
issue. Given the mushroom growth of different types of economic models,
it seems almost impossible to decide their relative importance, at a
purely theoretical level. So in this paper, we have tried to deal with
this issue empirically in the context of Pakistan. In surveying the
literature, we can find a number of empirical studies on this issue, but
most of them are for the developed countries. Similar studies for the
developing countries are rare. We have been able to find only two such
studies for Pakistan, one by Hussain (1982) and the other by Masood and
Ahmad (1980). The study by Hussain (1982) covers the period from 1949-50
to 1970-71, and the data used in this study pertain to united (East and
West) Pakistan. So the results of his study can hardly be of much
relevance to present Pakistan. Masood and Ahmad (1980) use data for
present Pakistan from 1959-60 to 1976-77 in their study. They regress
induced' expenditures on autonomous expenditures and money supply and
assess the relative importance of the two exogeneous variables, on the
basis of t-values and beta-coefficients. Their definition of induced and
autonomous expenditures seems to be a little arbitrary. Agricultural
income, an independent variable in their regressions, turns out to be a
dominant variable in a number of equations. The negative sign of the
autonomous expenditures in some regressions is difficult to justify.
Their efforts, to determine the lag structure, have also been
unsuccessful. Although their data are from many individual sources, they
have not applied any formal tests to check the consistency of the data
and the possible structural change that might have taken place due to
the separation of East Pakistan.

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DOI: https://doi.org/10.30541/v26i4pp.541-551

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