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

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Listed:
  • Kundu, Nobinkhor
  • Khandaker, M.A. Munim

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.

Suggested Citation

  • Kundu, Nobinkhor & Khandaker, M.A. Munim, 2016. "Long-run Effects of Government Debt on Interest Rate: Evidence for Bangladesh," MPRA Paper 100928, University Library of Munich, Germany, revised 09 Apr 2016.
    • Handle: RePEc:pra:mprapa:100928
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    References listed on IDEAS

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    More about this item

    Keywords

    Government Debt; Interest Rate; Time-series data; VECM; Bangladesh;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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