The role of key macroeconomic variables in fiscal deficit of Pakistan: an empirical analysis
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Date
2012
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Abstract
The present study aims to explore some of the important factors contributing to the fiscal deficit in Pakistan. GDP per capita, total debt servicing as percentage of GDP, volume of trade as share of GDP, and monetary asset (proxy for money supply) as share of GDP are considered major factors affecting fiscal deficit in Pakistan. The period taken for analysis ranges from 1976 to 2009. The study applies ADF and Phillip Perron tests to investigate stationarity; Johansen Maximum Likelihood technique to explore the existence of long run relationship among the running actors of the study, Fully Modified Ordinary Least Square Method to estimate the long run coefficients., Error Correction Mechanism to inspect the short run coefficients and finally, Granger Causality test to investigate the direction of causality among the operating variables of the present study for Pakistan. The empirical evidence shows that GDP per capita and money supply are significantly squeezing fiscal deficit in Pakistan in both the short run and long run span of time. The total debt servicing lagged by one year declines fiscal deficit in the long run. However, volume of trade; total debt servicing and time trend are positively and significantly contributing to the fiscal deficit in Pakistan in the both long run and short run time span. Moreover; the empirical findings report that there exists univariate Granger causality from fiscal deficit to GDP per capita, from fiscal deficit to money supply, from volume of trade to.GDP per capita, and from money supply to GDP per capita. Finally, the present study diagnoses the existence of bivariate Granger causality between volume of trade and fiscal deficit in Pakistan.
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Keywords
Fiscal Deficit, Total Debt Servicing, Volume of Trade, Money Supply, Augmented Dicky Fuller, Granger Causality, Johansen Maximum Likelihood
Citation
Paper presented at 2nd International Conference on Business Management, 28th – 29th March 2012, Lahore - Pakistan