Long-run Effects of Government Debt on Interest Rate: Evidence for Bangladesh

Nobinkhor Kundu and M.A. Munim Khandaker

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores the phenomenon that each year a major portion of the government debt in Bangladesh is expended on interest payment, giving rise to more budgetary deficit in the future. Ever-rising government debt is, however, not the only budgetary item that may be responsible for crowding out private borrowing. The paper empirically investigates the long-run effects of government debt on long-term nominal interest rate and explores the short-run dynamics in the context of capital market in Bangladesh. Using time-series data on Bangladesh and applying vector error correction model (VECM), this study finds a single cointegrating equation depicting long-run stable relationship between long-term nominal interest rate and the explanatory variables in the model. The study also finds convergence of short-run dynamics of government debt towards statistically significant long-run equilibrium and concludes that government debt has a positive impact on the long-term nominal interest rate in the capital market of Bangladesh.

Keywords: Government Debt; Interest Rate; Time-series data; VECM; Bangladesh (search for similar items in EconPapers)
JEL-codes: C22 E43 H63 (search for similar items in EconPapers)
Date: 2016-01-03, Revised 2016-04-09
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Published in The Jahangirnagar Economic Review 1.27(2016): pp. 49-60

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:100928

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