DOES MONETARY POLICY INFLUENCE ECONOMIC GROWTH IN PAKISTAN (original) (raw)
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Is Monetary Policy or fiscal policy more effective in Economic Growth in Pakistan
Is Monetary Policy or fiscal policy more effective in Economic Growth in Pakistan, 2016
This research paper looked to investigate whether fiscal or monetary policy was more effective in economic growth in Pakistan. With massive investments in infrastructure and the development of Gwadar port that is run with partnership with China the correct economic policy is necessary to produce economic growth. The majority of the past papers discussing Pakistan were limited to economic data until 2009. This paper presented econometric analysis of time series data for Pakistan until 2012. This paper used data from various sources to test the hypothesis that monetary policy was more effective than fiscal policy in Pakistan. Government expenditure was used a proxy for fiscal policy and money supply was used as a proxy for monetary policy and gross domestic product was used as the other variable. The variables used were all in local currency due to effective econometric analysis and the variables were all log linearized. The econometric techniques used included stationary analysis using Augmented Dicker-Fuller test (ADF), the ordinary least squares regression (OLS), co-integration test using a residual series and the Johansen co-integration test. The vector error correction mechanism (VEC) was also used as was the vector auto regressive model (VAR) and the Granger causality test was applied to see if there was any causality. The OLS regression showed that monetary policy was more effective then fiscal policy but due to the data being time-series further analysis were needed. The ADF test showed that the variables were non-stationery originally but were stationary on the first difference. Both the residual and Johansen co-integration test showed that the variables were co-integrated. The VEC results did not make any economic sense and the VAR results were showing that monetary policy was more effective but the R-Squared was very low. By amending the variables and using money supply and government expenditure on exogenous variables on the VAR estimation was as the hypothesis predicted but also with a 0.99 Adjusted R-squared.