Analyzing the Economic Growth of Pakistan: A Comprehensive Study of Fiscal and Monetary Policy Dynamics from 1991-92 to 2021-22

Abstract

Purpose: The present study was aimed at assessing the effectiveness of Fiscal Policy Dynamics in terms of Total Expenditure, Total Revenue and Fiscal Deficit Fiscal Deficit and Monetary Policy Dynamics in terms of Money Supply, Interest Rate, Inflation Rate and Exchange Rate towards GDP economic growth rate of Pakistan’s economy during 1991-92 to 2021-22.  

Method:  Time series data set ranges from 1991-92 to 2021-22 from authenticated sources were utilized for present research study. Econometric analysis was done i.e Augmented Dickey Fuller Test, Log-linear response functions, Autoregressive Distribute Lags Model, Bound Test,  Error Correction Mechanism, Variance Inflation Factors for checking multicollinearity in the model, Heteroscedasticity test, Lagrange Multiplier (LM) Test, Normality Test, Granger Causality Test, Impulse Response Function and Walt Test were employed.

Results: Findings revealed that almost all respective tested variables in the regression model were either found stationary at level I(0) or by taking at 1^st difference I(1). Since some of the variables were found stationary at level and some were also found stationary at 1st difference then application of Autoregressive distributed lag Model (ARDL) examined co-integrating relationships between tested variables in the regression model. F-Statisticss value of Bound Test revealed long run relationships of tested variables in the model.  The value of Co-integrating equations was worked out almost negative and significant depicting adjustment speed from short run dynamics towards long run equilibrium. Application of Variance Inflation Factors almost indicated non-existence of severe multicollinearity in the model. With the application of Homoscedasticity Test, homoscedasticity was experienced among the explanatory variables in the model, because significant F-value rejected the HO hypothesis of no heteroscedasticity in the model. Lagrange Multiplier (LM) Test was employed to check serial correlation or autocorrelation in the model. Significant F-Value of LM Test confirmed the non-existence of serial correlation or autocorrelation in the model. Findings of Granger Causality Test revealed bi-directional, uni-directional or no granger causal relationship between tested variable in the model. Impulse Response Analysis indicated negative as well as positive responses; shock to GDP noticed symmetric impact on Fiscal Deficit, Current Account Deficit and Trade Deficit alongwith Components of Balance of Payments in short run and long run. Application of Wald test almost confirmed the significance of independent variables for a model.

Conclusion: Results revealed positive and significant effects of Total Expenditure, Total Revenue and Fiscal Deficit Fiscal Deficit as proxies of Fiscal Policy Dynamics and Money Supply, Interest Rate, Inflation Rate and Exchange Rate as proxies of Monetary Policy Dynamics towards GDP economic growth rate of Pakistan’s economy over a period of time 1991-92 to 2021-22.

Implications: The study concludes the implications in terms of causes and effects of Fiscal Policy Dynamics and Monetary Policy Dynamics in relation with economic growth, which could be overcome, emphasizing the need to reduce the burden of deficits by boosting exports through good fiscal managerial strategy, provide employment and investment opportunities, generate capital accumulation so necessary to alleviate poverty and accelerate economic growth of Pakistan’s economy.