The Economic Cost Of The Fiscal Policy Uncertainty In Pakistan
Author: Sheeba Waheed

This thesis examines the effects of the uncertainty arising from fiscal policy decisions. In this paper, we empirically examine the effects of uncertainty about fiscal policy on economic activity using Pakistan time series data. To this end, we propose a new measure of fiscal policy uncertainty (FPU). We estimate a fiscal uncertainty through variance in the fiscal stance. This paper uses the change in the structural primary balance (SPB) as a measure of fiscal stance. In order to account for uncertainty, the fiscal stance is based on the annual change in the SPB, which enables it to be compared with the economic projections and estimate SVAR model. SVAR model with fiscal uncertainty shows that an increase in fiscal policy uncertainty has negative, sizable, and prolonged effects on economic activity. Moreover, an unanticipated increase in our FPU measure has adverse effect on the economy in both the short and long term. The empirical evidence suggests that the estimated coefficient of fiscal uncertainty suggests that one % shock in FU decreases output by 6 %. The impulse response function shows that fiscal uncertainty has impact on the lncpi, lnDB, lnTD, lnIR and lnoil in both short and long run except lnER. In addition, our main result is that shocks to lnfu has impact on the lnY both in short and in long run. One policy suggestion based on the empirical finding is clear announcement of future government spending path. Supervisor:- Dr. Nasir Iqbal

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Supervisor: Nasir Iqbal

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