Do Public Expenditure and Macroeconomic Uncertainty Matter to Private Investment? Evidence from Pakistan

Abstract

This study examines the role of macroeconomic uncertainty and public expenditure in determining private fixed investment in Pakistan. It is found that individual series are nonstationary. There is a long-run relationship between private fixed investment, public consumption expenditure, public development expenditure, and market activities. It is revealed that public development expenditure stimulates private investment, whereas public consumption expenditure is detrimental to private investment. The preferred dynamic private fixed investment function confirms that in the short run, public development expenditure enhances private investment. Moreover, macroeconomic instability and uncertainty depresses private investment in Pakistan.

The China-Pakistan Economic Corridor (CPEC): Considering Contemporary Pakistan through Old-Fashioned Economics and Historical Case Studies

“…There has been some work on crowdingin of private investment in the Pakistani context. The general finding is that public investment has a positive impact on private investment (Khan, 1988;Hyder, 2001;Naqvi, 2002;Ahmed & Qayyam, 2007) though some argue the opposite (Ghani & Ud Din, 2006).…”

Effects of Macroeconomic Uncertainty on Investment and Economic Growth: Evidence from Pakistan

“…Similarly macroeconomic instability and uncertainty affect negatively the private investment in Pakistan. Ahmad and Qayyum (2009a) analyze the investment behavior of private sector in large scale manufacturing. They explore the role of public expenditures (development and non development) and macroeconomic uncertainty in determining private sector's fixed investment in large scale manufacturing and indicated that public development expenditures enhance the private investment whereas nondevelopment expenditures and macroeconomic uncertainty negatively affect private investment.…”

“…Ahmad and Qayyum (2007) examine the role of macroeconomic uncertainty and public expenditure in determining private fixed investment in Pakistan for the period 1972-2005. They find that there is a long-run relationship between private fixed investment, public consumption expenditure, public development expenditure, and market activities.…”

Private, Public and Foreign Investment Nexus in Pakistan: An Empirical Analysis of Crowding-In/Out Effects

“…The real interest rate (Int) is constructed as the weighted average of three interest rates i.e. call money rate, discount rate and government bond yield rate (see Ahmad and Qayyum, 2009;Ahmad et al, 2008). After taking average, it is converted in real terms by subtracting GDP deflator inflation rate from the average.…”