ROLE OF FISCAL AND MONETARY POLICY IN GROWTH AND EMPLOYMENT GENERATION IN PAKISTAN

THIS DISSERTATION IS SUBMITTED TO THE DEPARTMENT OF ECONOMICS IN PARTIAL FULLFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER IN ECONOMICS

Submitted By: Muhammad Bilal ROLL NO. 11 SESSION 2011-2013

Supervisor: Dr. Abdul Ghafoor Awan

DEPARTMENT OF ECONOMICS

INSTITUTE OF SOUTHERN PUNJAB,

(MULTAN)

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Dedication
This Assignment is dedicated to My Respected Teacher Who has supported me all the way With her knowledge, wisdom, And guidance, I would not have the goals I have to strive and Be the best to reach.

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DECLARATION
I solemnly declare that this research work is written by me in partial fulfillment for the degree of M.Sc in Economics and it is free from plagiarism.

Muhammad Bilal ROLL NO. 11 DEPARTMENT OF ECONOMICS INSTITUTE OF SOUTHERN PUNJAB, (MULTAN CAMPUS)

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CERTIFICATE
This thesis "Role of fiscal and monetary policy in growth and employment generation in Pakistan" by Muhammad Bilal is accepted in its present form by the Department of Economics as satisfying the thesis requirement for the degree of M.Sc in economics.

Supervisor

Chairman

External Examiner

ACKNOWLEDGEMENT

All humble words of profoundest thanks are due to ALLAH Almighty the compassionate and the merciful Who blessed me determination, potential and ability to complete this work successfully within the stipulated time. All praise is for the Holy prophet Hazrat Muhammad (SAW) Who brought the message of peace and happiness to all creatures. I deem it may utmost pleasure to avail myself this opportunity in recording my deep feelings of regards and sense of gratitude to my great supervisor, Dr Abdul Ghafoor Awan department of Economics, who extended his sincere cooperation and invigorating encouragement during the course of present study. I wish to express my sincere thanks to my valued teachers (Muhammad Shahid Iqbal, Adnan Akbar, Mam. Rabia Hanif, Mam. Kiran Kousar, Mam. Afshan Saeed) for their invaluable educational guidance and devotion during course work and accommodating behavior during research work. I would also like to thanks my loving and sweet Friends and brother for their encouragement, immense horizons, mellifluous moral support, and patience, spiritual and intellectual inspirations who have always wish to see me glittering high on the skies of success and whose hands always rise in prayers for my success. I express love and appreciation to my family for their never ending love and extended cooperation.

Muhammad Bilal

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ABSTRACT The main purpose of the study is to find out the Role of fiscal and monetary policy on growth and employment generation in Pakistan. For empirical investigation OLS (ordinary least square) and log liner model is employed to find short run and long run association. The data is used for the period of 1972-2009. The findings show that total government expenditures are negatively related to employment level in the economy, while money supply is found to be positively related with employment. The reason behind the negative relation between total government expenditures or revenues and employment are that by imposing more taxes on business community government will reduce the investment and saving in the economy which will employment in the economy. On the other hand total labor force and money supply are found to be positively related with economic growth of the economy while government expenditures have negative and significant impact on economic growth the reason behind is that most of the government expenditures are non-development expenditures e.g. defense expenditures which discourage economic growth in the economy. The authors recommendations includes among others the following: firstly government should control the non-development expenditures and convert these released resources for development purposes e.g. infrastructure building and in power sector which will create employment and boost up economic growth. Secondly focus of the government should be on widening the tax base by expanding the net of direct tax payers. Thirdly government should provide tax concession to the investors so that capital outflow can be controlled and in this way employment opportunities will increase. Lastly state bank should start micro finance scheme so that it will encourage self-employment scheme.

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TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION 1.1 Research of the problems 1.2 Objectives of study 1.3 Significance of the study CHAPTER 2: THE REVIEW OF LITERATURE CHAPTER 3: THEORETICAL FRAMEWORK 3.1 Concept of Employment 3.2 Self employment 3.3 Under employment 3.4 Full employment 3.5 Definition of Unemployment 3.6 Unemployment rate 3.7 Unemployed persons 3.8 Measuring Unemployment. 3.9 Types of Unemployment 3.10 Fiscal Policy Definition 3.11 Monetary Policy Definition 3.12 Theoretical Background of Fiscal and Monetary Policy 23 23 23 23 24 24 24 25 26 26 30 33 36 07 05 05 05

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3.13 Money Supply Definition 3.14 Government Spending or Expenditures Definition 3.15 Taxes Definition 3.16 Subsidies Definition 3.17 Definition of GDP / Gross Domestic Product CHAPTER 4: DATA AND METHODOLOGY 4.1 Data Source 4.2 The Models 4.3 Explanation of the variables 4.4 Methodology 4.5 The Equations and their Interpretation

41 42 44 46 48

52 52 52 53 53 54

CHAPTER 5: ESTIMATIONS AND DISCUSSION 5.1 Regression Analysis 5.2 Estimation Results 5.3 Operational Definitions of Variables CHAPTER 6: CONCLUSION AND POLICY RECOMMENDATION 6.1 Conclusion 6.2 Recommendation for Economic Growth REFERENCES APPENDIX 60 61 62 65-66 55 56 58

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