AN ANALYSIS OF SHORT-TERM EFFECTS OF BUDGET DEFICITS ON MACROECONOMICS VARIABLES: EVIDENCE FROM PAKISTAN (1960-2005)

This paper critically analyzes short-term effects of budget deficit on money supply, private and public investment, out put, balance of payment, international reserves and unemployment. Annual data for the period 1960-2005, taken from Economic Survey of Pakistan (various issues) and International Financial Statistic (2003) is used for analysis. Error Correction Mechanism (ECM) is used for estimation. The study revealed that short run changes in money supply is positively related to short run changes in foreign reserves. The short run change in money demand is positively related to short run changes in income. The short run changes in output is positively related to short run changes in consumption expenditures, private investment, public investment, and balance of trade. It is negatively related to short run changes in real rate of interest. Short run changes in private and public investment is positively related to short run changes in output. Short run changes in export is positively related to short run changes in output, relative prices of export, and exchange rate. Short run change in import is negatively related to short run changes in exchange rate. Short run change in unemployment is negatively related to short run changes in output growth (GDP). Based on findings of the study it is recommended that long-term private/public investment policies, can gain better result in economic growth. Export sector needs more attention in term of quality standard, price control, and internationally adopted marketing strategies. Skill development may also accelerate employment generating capacity of output growth