Non-linear Fiscal Multiplier: A Case Study Of Pakistan
Author: Javeria Malik

The purpose of this thesis is to assess the non-linear effects of fiscal policy variables, particularly to evaluate the policy response of the fiscal variables in different economic states i.e. recession and expansion over the sample period of 1974-2017. We consider Threshold Vector Autoregressive Model (TVAR) and Orthogonalized Impulse Response Functions to test for non-linearities in the responses of GDP and other macroeconomic variables to fiscal policy shocks. The variations in the size of fiscal multipliers are assessed under two regimes of the economy: low (expansion) and high (recession) unemployment rate regimes. Our empirical findings support the non-linear effect of fiscal policy, with government spending multiplier is higher and more persistent during recession. While tax multiplier is insignificant in both regimes. The response of consumption, investment and employment to government spending shocks also depends on the state of the economy. And we also found that the effect of current spending and development spending on output is higher in recession than expansion. While comparing the both type, the effect from development spending is larger than the effect from current spending. The findings of this study suggest that authorities can adopt the fiscal policy to stabilize the short run fluctuations in economic activity by increasing the government expenditures, as this tool of fiscal policy is more effective compared to taxes in Pakistan economy’s context especially in the times of recession. Moreover, if government wishes to increase the effectiveness of its expansionary fiscal policy, it should focus on increasing the ratio of development spending to total government spending, which is just 19% at present, because the multiplier of development spending is larger than the multiplier of current spending. Supervisor:- Dr. Mahmood Khalid

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Supervisor: Mahmood Khalid

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