Abstract

Abstract This study investigates the dynamic asymmetric effect of fiscal deficit on growth in Pakistan using the Non-Linear ARDL technique. We employ the Mankiw et al (1992) model on annual time series data from 1976 to 2017 and find co-integration relationship between growth and cyclically adjusted primary fiscal deficit along with other variables. More generally the study seeks to empirically test the asymmetric effect that fiscal deficit has on economic growth in Pakistan. The results reveal the negative effect of expansionary fiscal policy on economic growth. From the tests of asymmetry, we find asymmetric effect of overall fiscal deficit in the short-run only, while there is no such asymmetry in the long-run. The asymmetric analysis of fiscal deficit at disaggregated levels evidences only short-run impact asymmetry in case of public spending, while both the long-run and short-run asymmetries are found in the case of public revenue. The analysis reveals that tax-based consolidation is likely to be more expansionary than spending-based adjustment in the long-run.

Keywords: Cyclically adjusted primary deficit, GDP, NARDL

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