Abstract
This paper explores the impact of fiscal spending on key macroeconomic indicators for Pakistan economy using an estimated open economy new Keynesian dynamic stochastic general equilibrium (DSGE) model. Results show that a positive shock to government consumption leads to fall in private consumption, private investment and exports owing to negative wealth effect, rise in interest rate and domestic currency appreciation, respectively. Imports and inflation also rise. Estimated values of present value fiscal multipliers are 0.54, 0.29 and 0.18 after 1 year, 5 years and 10 years, respectively. These results show that although positive in the short run, yet the magnitude of the fiscal multiplier is very low in the case of Pakistan. Sensitivity analysis shows that the value of the multiplier marginally rises with rise in degree of price stickiness. Transitory shocks have a substantially higher multiplier relative to persistent shocks.
Keywords
General equilibrium, Models and applications, Fiscal policy
DOI
https://doi.org/10.54784/1990-6587.1009
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Recommended Citation
Raashid, M., Saboor, A., & Ahmad, S. (2020). Fiscal policy transmission mechanism in Pakistan: A general equilibrium analysis. Business Review, 15(1), 50-66. Retrieved from https://doi.org/10.54784/1990-6587.1009
Published Online
December 09, 2020
Included in
Finance Commons, Management Sciences and Quantitative Methods Commons, Marketing Commons
Publication Stage
Published
Article Timeline
Submitted
09-12-2020
Published
01-01-2020
