FISCAL DISCRETION AND AGGREGATE DEMAND: A CASE STUDY OF PAKISTAN

Abstract

The goal of the study is to investigate the impact of discretionary fiscal policy on aggregate demand. Secondly, we analyze the factors that affect fiscal discretion regarding Pakistan over the period 1984-2020.The discretionary fiscal policy is measured by using fiscal policy rule. We exert Generalized Method of Moments (GMM) in order to find the relationship between variables. The results show that fiscal discretion has no effect on aggregate demand.  Findings also show that government size, income level, institutional quality and country size are negatively related to fiscal discretion while inflation rate is positively related to fiscal discretion. High efficacy of institutions and more checks and balances on government reduce the discretion. High inflation is related to high price volatility, which ultimately affects discretionary spending.