Inter-Dependencies and Causality in the Macroeconomic Variables: Evidence from Pakistan (1960-2005)

This paper critically evaluates the inter-relationship, vulnerability to innovation, and causality among the macroeconomic variables (budget deficit, economic growth, unemployment 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 decomposition and Granger Causality test is used for the analysis. The study revealed that any innovation of one standard deviation took seven years for economic growth and budget deficit, eight years for unemployment and more than ten years for poverty reduction. The response of the macroeconomic variables to innovation or impulses introduced is mostly explained in their own. Only two unilateral causality are found. Bilateral causality 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 policy formation and implementation must be reduced. Key words: interdependency in macroeconomic variables; causality in macroeconomic variables