The macroeconomic impacts of government debt in Pakistan

Abstract

This paper examines the Ricardian equivalence hypothesis in Pakistan using a vector error correction model. The sample period extends from June 2002 to January 2020. The results are reported using variance decompositions and impulse response functions. The base model contains six variables and is estimated with 4 lags. We find support for the idea that wealth does not increase as government debt increases; Hence, it proves the fact that economic agents are rational actors and foresee current expansionary actions of the government that result in accumulation of debt as the present value of future taxation that they have to pay and not as an increase in wealth. The results remain robust to a change in sample, in Choleski ordering of the variables and in the lag length of the estimated models.

Keywords

• ricardian equivalence
• the real federal government debt
• vecm
• pakistan