Response of Long-term Interest Rate to Fiscal Imbalance: Evidence from Pakistan

Noor-e- Saher () and Mehran Herbert
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Noor-e- Saher: Scholar at Applied Economics Research Centre, Karachi
Mehran Herbert: Scholar at Applied Economics Research Centre, Karachi

SBP Research Bulletin, 2010, vol. 6, 43-49

Abstract: The study analyzes the role of fiscal deficit in explaining movements in long-term interest rate in Pakistan. We have investigated the long run relationship between budget deficit and long-term interest rate along with GDP growth, expected inflation, capital inflows and short-term interest rate during the period from 1975 to 2008 by applying cointegration technique. We have found that a 1 percent increase in the budget deficit leads to more than 40 basis points increase in longterm interest rate in Pakistan thereby increasing the cost of funds for investment.

Keywords: Budget deficit; long term interest rate (search for similar items in EconPapers)
JEL-codes: E43 H62 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:sbp:journl:44

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