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

Naeem Ur Rehman, Moin Ullah


The aim of the present analysis is to examine the long and short run relationship
between budget deficit (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 findings show that there is unilateral causality
from real economic growth (Y) to budget deficit (BD) and investment (RINV) to
budget deficit (BD). An ARDL approach to Cointegration confirms the long and
short run co- ntegration between economic growthand budget deficit at 5% level
of significance. There is also co-integration between budget deficit and
investment at the same level of significance in the short run but in long run ARDL approach confirms Cointegration between budget deficit and investment at 10 % level of significance only. The result shows that the budget deficit hampered economic growth and investment negatively both in short and long run.


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ISSN 2521 – 5515