A cointegration analysis between macroeconomic variables and fiscal deficit in Pakistan

Mian Nasir Uddin,Muhammad Tariq,Saleem Khan

doi:10.34260/jaebs.214

Abstract

This paper estimates the short and long run association between selected macroeconomic variables and fiscal deficit in Pakistan for the period of 1985 to 2016. Macroeconomic variables such as exports, exchange rate, GDP per capita, inflation, gross capital formation have strong implications for the fiscal deficit. This study checks the data for stationarity using the Augmented Dickey Fuller test. Johansen Co-integration test and Vector Error Correction Method are used to investigate both the short and long run relationships. Results indicated the existence of both short run and long run relationship between the macroeconomic variables and fiscal deficit. The findings of the study revealed that exports, exchange rate, GDP per capita, inflation, gross capital formation are important determinants of fiscal deficit in Pakistan. The study suggested that the government may focus on these factors to overcome fiscal deficit in Pakistan.

Highlights

Fiscal deficit arises when the government's expenditures are more than the government’s revenues
Augmented Dickey-Fuller (ADF) test was applied to the data for checking the stationarity in data
The Augmented Dickey Fuller (ADF) the results showed that all the variables were stationary at first difference

Summary

Introduction

Fiscal deficit arises when the government's expenditures are more than the government’s revenues. Payments needed for fiscal imbalances create variations in the interest rate and increase government loans. One of the main reasons of fiscal deficit is an increase in public spending with constant or decreasing collection of revenues through taxes and other sources. Reduction in fiscal deficit can have negative effect on social development as many underdeveloped economies in order to minimize fiscal deficit, they reduce investments in social sectors such as health, education, and infrastructure. Others reduce it by increasing the tax rate.

Methods

Results

Conclusion