FISCAL DEFICIT AND INFLATION: AN EMPIRICAL MEASURE IN VIEW OF PAKISTAN
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Abstract
Much of the literature on macroeconomic issues is devoted to inflation, unemployment, economic growth and budget deficit. This paper contributes by evaluating the relationship of price level with fiscal deficit in case of Pakistan. Fiscal deficit creates more hurdles and narrowing the space for implementing other economic decisions for the betterment of overall economy. Among multidimensional issues of fiscal deficit, inflation is more highlighted in everyday newspapers and political talk shows. During the period of economic downturn, government needs more resources to overcome social and economic problems faced by the society. Presently Pakistan also faces the period of high inflation and trying to ease the negative impact by implementing different social security programs. Expenditures incurred in these policies resulted in fiscal deficit, covered mostly by domestic and international borrowings and high tax rates that in turn may lead to increase inflation. For this purpose, an Autoregressive Distributed Lag Model (ARDL) is applied to time series data time span from 1971 to 2021, collected from various national and international reports and economic issues. The paper concluded that budget deficit and exchange rate are the variables that affect INFL in the short as well as in long-run, whereas MSP has only long run effect on inflation.
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