Dynamic Effects of Fiscal Policy Shocks on Macroeconomic Variables: An Application of SVAR Methodology for Pakistan

Abstract

Change in government spending and tax has significant impact on main macroeconomic activities. This study aims to investigation dynamic effects of fiscal policy shocks on macroeconomic variables in Pakistan. The empirical results are carried out by using the structural vector autoregressive model. Two identification approaches, Blanchard and Perotti and recursive approach are used to identify the fiscal policy shocks. The analysis is conducted on quarterly data for the variables government spending, tax revenue, prices, private investment and GDP for the period 1975-2-14. The empirical results shows that government expenditure shock and tax revenue shock relatively highest on price and lowest on private investment. The government spending shocks decrease private investment and GDP, while tax revenue shock increase GDP and government spending. The results suggests that higher government spending have negative impact on private investment due to the large part of government consumption financing from the private sector. It is concluded that tax revenue shock increase the government spending, while government spending does not significant impact on the tax revenue. This result conform that expansion of fiscal policy increase the public debt services in Pakistan due to fiscal miss-management.  

Key wards: Fiscal Policy Shocks, Macroeconomic Variables, SVAR Methodology