EXPLORING THE TRANSMISSION MECHANISMS OF FISCAL POLICY IN PAKISTAN

Abstract

Fiscal policy plays a critical role in stabilizing the economy, promoting growth, and addressing unemployment and inflation through government spending and taxation. Understanding its transmission channels help policymakers design more effective interventions. This study analyzes the fiscal policy transmission mechanism in Pakistan using time series data from 1972 to 2023, sourced from the World Development Indicators and the Pakistan Economic Survey. It aims to identify fiscal policy channels, examine the link between macroeconomic variables and government spending, and assess the impact of fiscal policy on economic activity. The analysis uses the VAR model, along with impulse response and variance decomposition to understand the dynamic interactions and shocks among variables. The impulse response analysis shows that government spending boosts growth and lowers unemployment in the short term, though the effect fades over time. Tax increases, on the other hand, slow growth and inflation, with mixed impacts on jobs. Overall, spending has a stronger short-term benefit than taxation, but both effects are temporary.