Fiscal Policy Asymmetries, Government Effectiveness, and Political Stability in Pakistan: A NARDL Analysis

Abstract

The current study attempted to explore the asymmetric effects of fiscal policy and macroeconomic variables on political stability (PS) in Pakistan using annual data from 1999 to 2022. The Nonlinear Autoregressive Distributed Lag (NARDL) econometric structure is employed to capture potential asymmetries arising from positive and negative changes in tax revenue and government expenditure. Long run results disclosed a strong asymmetry in fiscal behavior. Positive tax revenue shocks significantly augment political stability, while negative shocks bring into play a weaker consequence, specifying that revenue expansions are more effective than contractions. Expenditure increases are insignificant in the long run, whereas expenditure depletion significantly improve PS, spotlighting the role of fiscal consolidation. Government effectiveness positively and strongly influences PS, while inflation shows a positive effect. Economic growth is weakly positive, whereas foreign direct investment negatively affects political stability. Short run dynamics confirm asymmetric revenue effects, with rapid adjustment toward long run equilibrium.