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Dynamic Analysis of Government Debt and Interest Rate an Empirical Analysis in Case of Pakistan

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Author Affiliations

  • 1FUUAST, PAKISTAN
  • 2 Applied Economics Research Centre, PAKISTAN

Int. Res. J. Social Sci., Volume 3, Issue (12), Pages 59-63, December,14 (2014)

Abstract

The current Renaissance of the government’s budget deficit has reawakened discussions concerning the impact of government debt on interest rates. Whereas the effects of government debt on the economy can function through a number of diverse channels, many of the recent apprehension about government borrowing have concentrated on the potential interest rate effect. Higher interest rates due to growing government debt can diminish investment, slow down the consumption on interest-sensitive durable goods, and reduce the worth of assets held by households, therefore ultimately distort consumption expenditures through a wealth effect. The degree of these potential unfavorable effects depends on the extent to which government debt actually raises interest rates. This paper evaluates the impact of government debt on interest rate in case of Pakistan using “Autoregressive Distributed Lag Model” (ARDL) approach. To study the relationship, time series data is used from the period of 1971 to 2012. To do the research applicable, Interest rate (r), government debt (GD) percentage of GDP and inflation (CPI) taken as variables to evaluate the relationship. The end results of the study show that the interest rate moves positively if government debt increases. The study also proposed long run and short run relationship exist among variables. This paper also proposed some valuable suggestions for policy making.

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