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

Author

Listed:
  • Noor-e-Saher

    (Scholar at Applied Economics Research Centre, Karachi)

  • Mehran Herbert

    (Scholar at Applied Economics Research Centre, Karachi)

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.

Suggested Citation

  • Noor-e-Saher & Mehran Herbert, 2010. "Response of Long-term Interest Rate to Fiscal Imbalance: Evidence from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 6, pages 43-49.
    • Handle: RePEc:sbp:journl:44
    as

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    File URL: http://www.sbp.org.pk/research/bulletin/2010/vol6/Responseoflongterminterestrates.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Budget deficit; long term interest rate;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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