Evaluating the Role of Fiscal and Monetary Policies in Economic Stabilization: Empirical Evidence from Pakistan

Abstract

Fiscal and monetary policies are fundamental to ensuring macroeconomic stability. An overly expansionary fiscal approach can diminish the effectiveness of monetary controls. Crafting an optimal mix of fiscal and monetary strategies is therefore essential, particularly under country-specific economic conditions. This study investigates the impact of fiscal and monetary policy instruments on Pakistan’s economic stability using data from 1980 to 2024. The study employs the Vector Autoregressive (VAR) model, Impulse Response Functions (IRF) and Variance Decomposition (VDC) to analyze the relationships. Results show that money supply initially exerts a negative impact on GDP but turns positive in the medium to long run. Fiscal policy, however, demonstrates stronger and more consistent influence on economic growth. Thus, fiscal instruments appear to be more effective than monetary measures in the context of Pakistan.