An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study
Purpose – This study aims to analyze the imbalances in the public finance structure of Pakistan’s economy and highlight the need for comprehensive reforms. Specifically, it aims to contribute to the empirical literature by analyzing the relationship between fiscal vulnerability, financial stress and...
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| Format: | Article |
| Language: | English |
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Emerald Publishing
2022-08-01
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| Series: | Fulbright Review of Economics and Policy |
| Subjects: | |
| Online Access: | https://www.emerald.com/insight/content/doi/10.1108/FREP-06-2021-0036/full/pdf |
| _version_ | 1797612017663606784 |
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| author | Khurram Ejaz Chandia Muhammad Badar Iqbal Waseem Bahadur |
| author_facet | Khurram Ejaz Chandia Muhammad Badar Iqbal Waseem Bahadur |
| author_sort | Khurram Ejaz Chandia |
| collection | DOAJ |
| description | Purpose – This study aims to analyze the imbalances in the public finance structure of Pakistan’s economy and highlight the need for comprehensive reforms. Specifically, it aims to contribute to the empirical literature by analyzing the relationship between fiscal vulnerability, financial stress and macroeconomic policies in Pakistan’s economy between 1971 and 2020. Design/methodology/approach – The study develops an index of fiscal vulnerability, an index of financial stress and an index of macroeconomic policies. The fiscal vulnerability index is based on the patterns of fiscal indicators resulting from past trends of the selected variables in Pakistan’s economy. The financial stress in Pakistan is caused from the financial disorders that are acknowledged in the composite index, which is based on variables with the potential to indicate periods of stress stemming from the foreign exchange market, the securities market and the monetary policy components. The macroeconomic policies index is developed to analyze the mechanism through which fiscal vulnerability and financial stress have influenced macroeconomic policies in Pakistan. The causal association between fiscal vulnerability, financial stress and macroeconomic policies is analyzed using the auto-regressive distributive lags approach. Findings – There exists a long-run relationship between the three indices, and a bi-directional causality between fiscal vulnerability and macroeconomic policies. Originality/value – This study contributes to the development of a fiscal monitoring mechanism, which has the basic purpose of analyzing the refinancing risk of public liabilities. Moreover, it focuses on fiscal vulnerability from a macroeconomic perspective. The study tries to develop a framework to assess fiscal vulnerability in light of “The Risk Octagon” theory, which focuses on three risk components: fiscal variables, macroeconomic-disruption-associated shocks and non-fiscal country-specific variables. The initial contribution of this work to the literature is to develop a framework (a fiscal vulnerability index, financial stress index and macroeconomic policies index) for effective and result-oriented macro-fiscal surveillance. Moreover, empirical literature emphasized and advised developing countries to develop their own capacity mechanisms to assess their fiscal vulnerability in light of the IMF guidelines regarding vulnerability assessments. This study thus attempts to fulfill the said gap identified in literature. |
| first_indexed | 2024-03-11T06:35:35Z |
| format | Article |
| id | doaj.art-1b531f81f3cc4afebb3e84055d83a313 |
| institution | Directory Open Access Journal |
| issn | 2635-0173 2635-0181 |
| language | English |
| last_indexed | 2024-03-11T06:35:35Z |
| publishDate | 2022-08-01 |
| publisher | Emerald Publishing |
| record_format | Article |
| series | Fulbright Review of Economics and Policy |
| spelling | doaj.art-1b531f81f3cc4afebb3e84055d83a3132023-11-17T10:53:46ZengEmerald PublishingFulbright Review of Economics and Policy2635-01732635-01812022-08-0121356010.1108/FREP-06-2021-0036An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric studyKhurram Ejaz Chandia0Muhammad Badar Iqbal1Waseem Bahadur2School of Public Affairs, University of Science and Technology of China, Hefei, ChinaDepartment of Management Sciences, COMSATS University Islamabad, Sahiwal Campus, Sahiwal, PakistanBusiness School, Xi'an International University, Xian, ChinaPurpose – This study aims to analyze the imbalances in the public finance structure of Pakistan’s economy and highlight the need for comprehensive reforms. Specifically, it aims to contribute to the empirical literature by analyzing the relationship between fiscal vulnerability, financial stress and macroeconomic policies in Pakistan’s economy between 1971 and 2020. Design/methodology/approach – The study develops an index of fiscal vulnerability, an index of financial stress and an index of macroeconomic policies. The fiscal vulnerability index is based on the patterns of fiscal indicators resulting from past trends of the selected variables in Pakistan’s economy. The financial stress in Pakistan is caused from the financial disorders that are acknowledged in the composite index, which is based on variables with the potential to indicate periods of stress stemming from the foreign exchange market, the securities market and the monetary policy components. The macroeconomic policies index is developed to analyze the mechanism through which fiscal vulnerability and financial stress have influenced macroeconomic policies in Pakistan. The causal association between fiscal vulnerability, financial stress and macroeconomic policies is analyzed using the auto-regressive distributive lags approach. Findings – There exists a long-run relationship between the three indices, and a bi-directional causality between fiscal vulnerability and macroeconomic policies. Originality/value – This study contributes to the development of a fiscal monitoring mechanism, which has the basic purpose of analyzing the refinancing risk of public liabilities. Moreover, it focuses on fiscal vulnerability from a macroeconomic perspective. The study tries to develop a framework to assess fiscal vulnerability in light of “The Risk Octagon” theory, which focuses on three risk components: fiscal variables, macroeconomic-disruption-associated shocks and non-fiscal country-specific variables. The initial contribution of this work to the literature is to develop a framework (a fiscal vulnerability index, financial stress index and macroeconomic policies index) for effective and result-oriented macro-fiscal surveillance. Moreover, empirical literature emphasized and advised developing countries to develop their own capacity mechanisms to assess their fiscal vulnerability in light of the IMF guidelines regarding vulnerability assessments. This study thus attempts to fulfill the said gap identified in literature.https://www.emerald.com/insight/content/doi/10.1108/FREP-06-2021-0036/full/pdfFiscal vulnerabilityFinancial stressMacroeconomic policiesPakistan |
| spellingShingle | Khurram Ejaz Chandia Muhammad Badar Iqbal Waseem Bahadur An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study Fulbright Review of Economics and Policy Fiscal vulnerability Financial stress Macroeconomic policies Pakistan |
| title | An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study |
| title_full | An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study |
| title_fullStr | An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study |
| title_full_unstemmed | An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study |
| title_short | An analysis of the linkages among fiscal vulnerability, financial stress and macroeconomic policies: an econometric study |
| title_sort | analysis of the linkages among fiscal vulnerability financial stress and macroeconomic policies an econometric study |
| topic | Fiscal vulnerability Financial stress Macroeconomic policies Pakistan |
| url | https://www.emerald.com/insight/content/doi/10.1108/FREP-06-2021-0036/full/pdf |
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