What Lies Behind Fiscal Deficit: A Case of Pakistan

Rukhsana KALIM, Muhammad Shahid HASSAN

Abstract


The article aims to investigate some of the important factors contributing to the fiscal deficit in Pakistan for the period of 1976 to 2010. International trade, economic growth, total debt servicing and broad money supply are considered as foremost factors affecting fiscal deficit in Pakistan. The empirical findings reveal that only economic growth has an insignificant impact on fiscal deficit in the long run but has significant impact in the short run. Whereas, all other factors such as international trade, total debt servicing and broad money supply affect fiscal deficit significantly in both short run as well as in the long run. Moreover, it is found that there exists univariate Granger causality which runs from economic growth to fiscal deficit, from total debt servicing to fiscal deficit, and there exists bivariate causality between money supply and fiscal deficit in the short run. Also, in the long run all the factors Granger cause to fiscal deficit. The study has also found the existence of joint causality among fiscal deficit, trade, economic growth, total debt servicing and money supply.


Keywords


Pakistan; fiscal deficit; economic growth; total debt servicing; international trade broad money supply.

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