Causality Tests and the Relative Effectiveness of Monetary andFiscal Policies in Pakistan

The Granger and the Sims causality tests as applied to annualdata from Pakistan for the period 1971-72 to 1989-90, help us inarriving at identical conclusions even though in the former test growthrates of the relevant variables were used and in the latter naturallogged and filtered variables were used. Both tests detectedunidirectional causality running from monetary variables (monetary baseand money stock) to nominal GNP in Pakistan for the period under study.Both tests also suggest that there is unidirectional causality runningfrom nominal GNP to the total government expenditure in Pakistan for theperiod under study. The findings of the study suggest that changes inmonetary variables do exert their influence on economic activity,represented by the nominal GNP, in Pakistan. The results of the studyalso provide some evidence that changes in total government expenditurerather than causing changes in the nominal GNP in Pakistan, are ratherinfluenced by the changes in the nominal GNP. Thus, the findings of thestudy suggest that the monetary policy was relatively more effectivethan the fiscal policy in influencing the nominal GNP in Pakistan,during the period under study.