Effects of Foreign Shocks on Fiscal Variables in Pakistan

Abstract

This study examines the domestic and foreign economic effects of fiscal shocks in Pakistan using the Johansen Cointegration technique and a Vector Error Correction Model with foreign exogenous variables (VECMX*). The analysis considers domestic fiscal and macroeconomic variables alongside their foreign counterparts and oil prices as a global variable. Time-series and panel data for Pakistan, India, Sri Lanka, Bangladesh, China, and the USA covering 1980–2020 were obtained from DOTS, IFS, and WDI. The findings indicate significant long-run relationships between domestic and foreign output, trade revenues, and Pakistan’s GDP. Foreign output has a positive effect on domestic output, while oil prices have a small negative effect. Overall, the results highlight the importance of considering both domestic and global factors when formulating fiscal policies aimed at promoting economic growth and stability.