The study examines the connection among public policy variables and economic growth in context of an economy of Pakistan. Theoretical and empirical literature has ever been showing a concern towards relationship among public policy variables and economic growth. Literature suggests mixed results regarding association of public policy variables and economic growth. The study empirically investigates the relationship between economic growth and public policy variables i.e. budget deficit, defense expenditures, public investment, private investment and level of education for Pakistan over the period 1980-2010. Time series econometric techniques such as Johansen Co integration, Vector Error Correction Model (VECM), Breusch-Godfray Langrage Multiplier (LM) test and Granger Causality test have been employed. The results of Johansen Co Integration test suggest the existence of long run equilibrium relationship among the variables. The results of VECM indicate that error correction terms for all the variables are statistically significant which show that public policy variables adjust to sustain the long run equilibrium growth. The results of LM test show that there is no autocorrelation in the series. The results of Granger Causality test show that causality runs from defense expenditure and private investment towards growth while a bi-directional causality is found between public investment-growth connections. The results of CUSUM and CUSUMSQ show the stability of functional relationship tested in this study which means that model is an effective instrument for policy making. So, a rise or fall in public policy variables will cause and have caused changes in economic growth in long run.

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