INTER-DEPENDENCIES AND CAUSALITY IN THE MACROECONOMIC VARIABLES: EVIDENCE FROM PAKISTAN (1960-2005)

Abstract

This paper critically evaluates the inter-relations hip, vulnerability to innovation, and causality amo ng the macroeconomic variables (budget deficit, economic growth, unemplo yment and poverty). Annual data for the period 1960 -2005 is used, taken from Economic Survey of Pakistan and International Financial Statistics. Vector Autoregressive (VAR) model with impulse response function (IRF), error variance decompositi on and Granger Causality test is used for the analy sis. The study revealed that any innovation of one standard deviation took seven years for economic growth and budget deficit, eigh t years for unemployment and more than ten years for poverty reduction. The response of the macroeconomic variables to innovati on or impulses introduced is mostly explained in their own. Only t wo unilateral causality are found. Bilateral causal ity is not found, and mostly independent type relationships are detected. Based on the finding of the study it is recommended, that target oriented fiscal policies should be focused on and the gap between p olicy formation and implementation must be reduced.

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