Macroeconomic Effects of Fiscal Policy: A Case Study of Pakistan
Author: Asmat Khan

The role of the fiscal policy in stimulating the economic activity of country has been one of the most important issues for policy makers. The effectiveness of the fiscal policy for stabilizing and sustainability of the economic activity is also very much challenging for the policy makers. I n this thesis we will work on the effectiveness of the fiscal policy on major economic variables using data of Pakistan from 1974 to 2013. The dynamic effects of fiscal policy can also be observed, this thesis describes response of output, inflation and interest rate to the fiscal policy shock. Here we will use Blanchard and Perroti (2002) methodology using Structure Vector Autoregressive (SVAR) model, which is the extension of the Sim (1986) and Bernanke (1986) proposed structural VAR used.Majority of the time structural vector autoregressive (SVAR) model is being used for quarterly data but here we will use annual data as fiscal policy is announced annually Using this method which is based on institutional information, after identifying the parameters impulse response is calculated to the check the effectiveness of the fiscal policy shock on the major macroeconomic variables. Variance Decomposition is also projected which describes the rise and fall of the variables due to dissimilar shocks at different time. After estimation crowding out phenomena is observed due to expenditure shock where it discourages the private investors and no response of prices is observed due to net tax shock, very weak sustainability is observed in both the cases. Supervisor: Dr. Mahmood Khalid

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Keywords : Fiscal Policy, Macroeconomic, Pakistan
Supervisor: Mahmood Khalid

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