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The Fiscal Deficit and Economic Growth in Pakistan: New Evidence

Nasir Iqbal (), Musleh ud Din () and Ejaz Ghani ()
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Musleh ud Din: Professor, Pakistan Institute of Development Economics, Islamabad, Pakistan
Ejaz Ghani: Professor, Pakistan Institute of Development Economics, Islamabad, Pakistan

Lahore Journal of Economics, 2017, vol. 22, issue Special Edition, 53-72

Abstract: This study revisits the relationship between the fiscal deficit and economic growth in Pakistan to determine whether there exists a threshold fiscal deficit that might serve as a benchmark for policymakers aiming to promote growth through fiscal expansion. We apply the smooth transition autoregressive model to time-series data for the period 1972–2014. The empirical analysis shows that the threshold level of fiscal deficit is 5.57 percent of GDP, above which the deficit has a negative impact on growth. Overall, the fiscal deficit has a negative impact on economic growth, mainly because it has tended to remain above the threshold level. However, there is room for fiscal policy to promote growth, provided the fiscal deficit is kept below the threshold level and public spending is channeled into productive investments that raise the country’s long-term growth potential.

Keywords: Fiscal deficit; threshold level; economic growth; STAR; Pakistan (search for similar items in EconPapers)
JEL-codes: H12 O47 C24 (search for similar items in EconPapers)
Date: 2017
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