Deficits, Debt and Interest Rates in Sri Lanka: Does the Spillover of Foreign Interest Rates Matter?

Suvra Prokash Mondal and Biswajit Maitra
Additional contact information
Suvra Prokash Mondal: Biswajit Maitra is an Associate Professor at the Department of Economics, University of Gour Banga, Malda, West Bengal 732101, India. E-mail: b_moitra@yahoo.com

Margin: The Journal of Applied Economic Research, 2022, vol. 16, issue 1, 28-48

Abstract: Fiscal policy’s impact on the interest rate has a controversial background. To reconcile theoretical uncertainties, researchers and policymakers often relied on empirical exploration. This article appraises the impact of external debt, domestic debt, the budget deficit, and foreign interest rates on interest rate variations in Sri Lanka, for the period when interest rates were deregulated. It applies the bounds testing procedure to the cointegration and error correction models within an autoregressive distributive lag framework. A set of relevant variables like the exchange rate, trade openness and money supply is controlled to corroborate whether such impacts are robust. It is found that the budget deficit elevates interest rates both in the long and short runs; external debt raises interest rates only in the long run; and domestic debt lowers interest rates both in the long and short runs. The spillover of foreign interest rates has a positive impact on Sri Lanka’s interest rate. As interest rates respond to domestic fiscal policy, they can induce fiscal discipline by affecting the cost of borrowing. On the other hand, the significant impact of foreign interest rates on Sri Lanka’s interest rate is a critical issue, as domestic macroeconomic policy has to face challenges to achieve its goal. JEL Classification: E62, E43, E52, H60

Keywords: Interest Rate; Public Debt; Budget Deficit; Foreign Interest Rate; Interest Rate Spillover; Exchange Rate; Trade Openness (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/09738010211067399 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:16:y:2022:i:1:p:28-48

DOI: 10.1177/09738010211067399

Access Statistics for this article

More articles in Margin: The Journal of Applied Economic Research from National Council of Applied Economic Research
Bibliographic data for series maintained by SAGE Publications ().