Impact of Monetary and Fiscal Policies of Inter Provincial Growth Disparities

Abstract

Standard growth theories assume that capital, labor, and knowledge are inputs, and these are combined to produce output in a country. Study estimates the determinants of economic growth in Pakistan at provincial level and the role of Fiscal and Monetary variables on the regional (province) growth in Pakistan. The study uses the data from 1990-to 2015 on provincial GDP growth, government expenditures, private final consumption expenditures, investment and money supply. The study has used the panel data analysis and fixed effect model to estimate the impact of fiscal and monetary policy on regional growth. First of all, the model shows that provincial current and development expenditures, federal expenditures and money supply are key determinates of growth in Pakistan. Study also finds that the decentralized fiscal policy reduces regional disparities in Pakistan. It reduces growth disparities by eliminating the expenditure gap across provinces. Study also finds that monetary policy increases the regional growth disparities. The main reason is the huge differences in the finical development across provinces in Pakistan. Based on the findings study suggest that centralized monetary policy would be more beneficial if the level of financial development reduced across regions in Pakistan.