Abstract
Fiscal policy is important for the economy through spending, taxes, and debt. For this purpose, the government of Pakistan uses different fiscal policy tools to achieve the targets of output, inflation, and unemployment. In this context, the present study analyzes the macroeconomic impacts of fiscal policy tools by using the annual time series data from 1975 to 2020 of Pakistan. The Structural Vector Auto-Regression methodology is used to estimate the effects through shocks produced by government spending and taxes. The results show that a spending shock has a positive effect on variations in output while a negative on unemployment whereas a positive tax shock has a negative impact on output, spending, and inflation. From the policy perspective, the government should use prudent fiscal policy by not increasing the tax rate but widening the tax base. This higher spending can be used to curtail unemployment and increase output.
Keyword(s)
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