Fiscal and Monetary Policy Interactions in Pakistan Using a Dynamic Stochastic General Equilibrium Framework

Muhammad Shahid, Abdul Qayyum and Waseem Shahid Malik

MPRA Paper from University Library of Munich, Germany

Abstract: Currently Pakistan’s economy is under stress and registered a sluggish growth for many years in a row. The performance of major economic indicators is not satisfactory. Low investment, double digit inflation, fiscal imbalances and low external capital inflows indicates the severity of the grave economic situation. This paper investigates fiscal and monetary policy interaction in Pakistan using dynamic stochastic general equilibrium model. Finding of the paper reveals that fiscal and monetary policy interacts with each other and with other macroeconomic variables. Inflation responds to fiscal policy shocks in the form of government spending, revenue and borrowing shocks. Monetary authority’s decisions are also affecting fiscal policy variables. It is also evident that fiscal discipline is critical for the effective formulation and execution of monetary policy.

Keywords: Monetary Policy; Fiscal Dominance; DSGE; Pakistan (search for similar items in EconPapers)
JEL-codes: E32 E37 E52 E61 E63 (search for similar items in EconPapers)
Date: 2016, Revised 2017
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Published in Research Journal Social Science 1.6(2017): pp. 1-29

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Related works:
Working Paper: Fiscal and Monetary Policy Interactions in Pakistan Using a Dynamic Stochastic General Equilibrium Framework (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:85549

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