The Macroeconomic Impact of Budget Deficit in Pakistan (1980-2014); A Time Series Analysis

Abstract

The aim of the present analysis is to examine the long and short run relationship
between budget deï¬cit (BD) and other macroeconomic variables like real
economic growth (Y) and real investment (RINV). The dynamic interactions are
studied through Granger causality test (VAR approach)as well as with the help of
autoregressive lag model approach to co-integration. The analysis is carried out
from the year 1980-2014. The ï¬ndings show that there is unilateral causality
from real economic growth (Y) to budget deï¬cit (BD) and investment (RINV) to
budget deï¬cit (BD). An ARDL approach to Cointegration conï¬rms the long and
short run co- ntegration between economic growthand budget deï¬cit at 5% level
of signiï¬cance. There is also co-integration between budget deï¬cit and
investment at the same level of signiï¬cance in the short run but in long run ARDL approach conï¬rms Cointegration between budget deï¬cit and investment at 10 % level of signiï¬cance only. The result shows that the budget deï¬cit hampered economic growth and investment negatively both in short and long run.