All Theses and Dissertations


Master of Science in Economics

Faculty / School

School of Economics and Social Sciences (SESS)


Department of Economics

Date of Award

Spring 2021


Dr. Khadija Bari

Second Advisor

Dr. Aneel Salman

Committee Member 1

Dr. Khadija Bari, Department of Economics, Institute of Business Administration (IBA), Karachi

Committee Member 2

Dr. Aneel Salman, COMSATS University, Islamabad

Project Type


Access Type

Restricted Access


xvi, 164


The study aims to develop an understanding between fiscal policy shock and credit market conditions. First, it develops an extended version of the medium scale dynamic stochastic general equilibrium (DSGE) model employed in Melina and Villa (2014). The extension here refers to the incorporation of labour market developed formally in Schmitt-Grohe and Uribe (2007). Secondly, it employs a vector auto regression model covering the period 1973-2012 to explain the dynamic effects of the shocks in government spending on macroeconomic variables in Pakistan. The impulse response functions are presented to analyse the transmission mechanism for the variables including government spending per capita, real gdp per capita, private consumption per capita, private investment per capita, debt to gdp ratio, long run interest rate , private lending per capita, credit spread and public debt. The identification of the fiscal policy shocks is achieved through the recursive VAR approach by Fatas and Mihov (2001). The results of my study suggest that the standard neoclassical assumptions for the effects of fiscal policy shocks hold well for the Pakistan’s economy. Moreover, credit spreads were found to behave in a countercyclical fashion which signals the existence of a borrower’s holdup effect in the financial markets of Pakistan. The results of the study were consistent with both regional and international studies done in past relating to the propagation mechanism of fiscal policy shocks.

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