Does Political Instability cause and affect Macroeconomic instability in Pakistan?

This study is intended to examine the cause and effect of political instability on macroeconomic instability in Pakistan over the period of 1993-2023. As the nature of the data is time series therefore stationarity testing is necessary and ADF and PP tests are used for the said purpose. ARDL is employed to tests the required impact and granger causality to get the required objective. Result of the ARDL model reported that Inflation rate and Unemployment rate negatively and significantly influenced Political stability in long-run. Besides this, ECM is applied for short run effect. ECM’s result shows that Unemployment rate, Exchange rate, and Current account balance negatively and significantly influence Political stability in short-run. In the second model, the impact of Political stability variables employed Political stability & absence of terrorism, Voice & accountability, Regulation Quality, and Government Effectiveness on Macroeconomic instability. ARDL model result indicated that Political stability & absence of terrorism, Voice & accountability, and Government effectiveness have negative and significant impact on macroeconomic crisis index. Bound test result shows long-run relationship existence among variables. Besides this, ECM model shows that Political stability & absence of terrorism, Voice & accountability, Regulation Quality, and Government Effectiveness negatively and significantly influence macroeconomic instability. Beside this granger causality test was applied to test causal relationships among variables. The test found that Macroeconomic instability unidirectional granger cause Political stability significantly. Furthermore, Political variables index and Inflation rate show bidirectional causality. Unemployment rate unidirectional causes Political variables index. Similarly, current account balance is unidirectional granger causal political index. On the other hand, only Voice & accountability shows unidirectional causal relationship with Economic variables index.