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Deficit Financing in LDCs: Evidence From South Asia

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Abstract

Fiscal policy triggers three distinct effects on the economy such as (1) interest rate effect (2) price effect and (3) exchange rate effect. A VAR system was developed to capture these effects in five South Asian countries. Empirical results suggest that budgetary action does not have any perceptible influence on the interest rate of the sampled countries. In terms of the price effect, fiscal action has opposite effects in Bangladesh and India. Fiscal action tends to increase aggregate price level in India but reduces the price level in Bangladesh, although the magnitude is very small. For Pakistan the price effect is positive but statistically insignificant while the price effect for Nepal and Sri Lanka is negative but statistically insignificant. Fiscal action is found to have no perceptible influence on the exchange rates of the sampled countries except Nepal where increased government expenditure tends to appreciate the Nepali currency. Overall, empirical findings suggest that expansionary fiscal action does not lead to crowding out behaviour in the sampled countries.

Suggested Citation

  • Chowdhury, Khorshed, 2004. "Deficit Financing in LDCs: Evidence From South Asia," Economics Working Papers wp04-18, School of Economics, University of Wollongong, NSW, Australia.
    • Handle: RePEc:uow:depec1:wp04-18
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    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/doc/uow012179.pdf
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    1. Benjamin M. Friedman, 1978. "Crowding Out or Crowding In? Economic Consequences of Financing Government Deficits," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 593-641.
    2. Keith M. Carlson & Roger W. Spencer, 1975. "Crowding out and its critics," Review, Federal Reserve Bank of St. Louis, vol. 57(Dec), pages 2-17.
    3. Benjamin M. Friedman, 1978. "Crowding Out Or Crowding In? The Economic Consequences of Financing Government Deficits," NBER Working Papers 0284, National Bureau of Economic Research, Inc.
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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    Cited by:

    1. Kreiter, Zebulun & Paul, Tapas Kumar, 2010. "Deficit Financing and Inflation in Bangladesh: A Vector Autoregressive Analysis," MPRA Paper 45981, University Library of Munich, Germany.

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    More about this item

    Keywords

    Deficit financing; crowding-out; South Asia;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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