Macro-Economic Policy Coordination and Macro-Economic Instability in Pakistan

Abstract

This study is intended to examine the impact of macroeconomic policies on macroeconomic instability in Pakistan. This study used time series data for the period of 1990 to 2022. To deal with the stationarity of the data ADF and PP tests are used which suggest the use of ARDL. The existence of a long-run relationship is confirmed by the Bound test. The impact of fiscal & monetary policy is found to be significant in the long run. The impact of the fiscal policy variable (GEXP) on macroeconomic instability (MI) negatively means that an increase in GEXP (expansionary fiscal policy) leads to a decrease in MI while the impact of monetary policy variable IR (tight monetary policy) is found positive and significant in the long run means that the impact of tight monetary policy leads to increase MI. Similarly, the impact of expansionary fiscal policy on MI is effective but the monetary policy variable is effective in the short run. The impact of domestic investment is found to be negative and significant means that an increase in domestic investment leads to a decrease in MI. Therefore this study suggests that special attention should be paid to fiscal and monetary policies to deal with MI in Pakistan.