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Fiscal Policy and Current Account Dynamics in the Case of Pakistan

Attiya Javid (), Muhammad Javid () and Umiama Arif
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Umiama Arif: Pakistan Institute of Development Economics, Islamabad

The Pakistan Development Review, 2010, vol. 49, issue 4, 577–592

Abstract: The study empirically investigates the effects of fiscal policy or government budget deficit shocks on the current account and the other macroeconomic variables, real output, real interest rate, and exchange rate for Pakistan over the period 1960-2009. The structural Vector Autoregressive model is employed; the exogenous fiscal policy shocks are identified after controlling the business cycle effects on fiscal balances. The results suggest that an expansionary fiscal policy shock improves the current account and depreciates the exchange rate. The rise in private savings and the fall in investment contribute to the current account improvement together with exchange rate depreciation. The twin divergence of fiscal deficit and current account deficit is also explained by the output shock, which seems to drive the current account movements and its co-movements with the fiscal balance.

Keywords: Restricted Vector Autoregressive Model; Current Account; Government Budget Deficit; Fiscal Policy; Exchange Rate (search for similar items in EconPapers)
JEL-codes: C01 C40 E60 E61 E62 E65 (search for similar items in EconPapers)
Date: 2010
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Handle: RePEc:pid:journl:v:49:y:2010:i:4:p:577-592