Abstract

This research investigates whether Pakistan’s fiscal multipliers are higher during periods of economic slack than during periods of non-slack. By using the Local Projection Method (LPM), we estimate how real GDP and inflation change in response to a government spending shock while distinguishing between states using high and low unemployment rates. Fiscal expansions are found to have limited and temporary effects on output, with multipliers remaining very small and consistently below unity across all degrees of economic slack. In contrast, their inflationary effects are more lasting and persistent. These findings support the idea that Pakistan’s fiscal stimulus is less effective in enhancing output growth in any state of the economy. This suggests that increased government spending during expansionary periods tends to crowd out private investment due to the dominant role of the public sector in the economy. As well as increasing the fiscal stimulus, causes inflation to fuel. Therefore, strengthening the private sector is essential, as sustainable economic growth cannot rely solely on government stimulus.