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Do Budget Deficits Raise Interest Rates in Nepal?

Author

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  • Shoora B. Paudyal

    (Economics Department, Tribhuvan University)

Abstract

This paper examines short term and long term relationship between nominal interest rates and budget deficits for Nepal using the data for 1988 to 2011. Engle and Granger Error Correction Mechanism (ECM) is applied for the analysis. The regression results show that budget deficits and budget deficits- GDP ratio do not have significant effects on nominal interest rates in Nepal. So, budget deficits in Nepal are interest rates neutral. We come to the conclusion that budget deficits are not crowding out the private investment in this country. However, the deficits have been increasing the burden of loans financing current consumption at the expense of the future consumption, which will have serious implications on the growth of economy.

Suggested Citation

  • Shoora B. Paudyal, 2013. "Do Budget Deficits Raise Interest Rates in Nepal?," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 25(1), pages 51-66, April.
    • Handle: RePEc:nrb:journl:v:25:y:2013:i:1:p:4
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    References listed on IDEAS

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    1. ,, 2009. "Public Finance and Public Choice: Analytical Perspectives," OUP Catalogue, Oxford University Press, edition 3, number 9780199234783.
    2. Ahmad, Mushtaq, 1994. "The Effects of Government Budget Deficits on the Interest Rates: A Case Study of a Small Open Economy," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 47(1), pages 1-6.
    3. Leanne Ussher, 1998. "Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature," Working Papers 0005 Classification- JEL:, Department of Economics, Queens College of the City University of New York.
    4. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
    5. Govinda Bahadur Thapa Ph. D., 2005. "Deficit Financing: Implications and Management," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 17, pages 16-26, April.
    6. Rajendra Pandit, 2005. "The Impact of Fiscal Deficit on Long-term Nominal Interest Rate in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 17, pages 113-133, April.
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    Cited by:

    1. Shoora B. Paudyal Ph.D., 2014. "Determinants of Inflation in Nepal: An Empirical Assessment," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 26(2), pages 61-82, October.

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    More about this item

    Keywords

    Budget deficits; interest rates; crowding out; Ricardian neutrality; Engle and Granger ECM;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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