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

Kundu, Nobinkhor and Khandaker, M.A. Munim (2016): Long-run Effects of Government Debt on Interest Rate: Evidence for Bangladesh. Published in: The Jahangirnagar Economic Review , Vol. 27, No. 1 (12 June 2016): pp. 49-60.

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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.

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