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The Impact of Fiscal Deficit on Long-term Nominal Interest Rate in Nepal

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  • Rajendra Pandit

    (Nepal Rastra Bank)

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    Abstract

    Growth of debt stock, changes in the debt composition, ownership structure of government debt and movement of interest rate on debt have been observed since the very beginning in Nepal. Public debt issues have been more and more market oriented and secondary market activities for short-term securities have expanded in recent years. Presently, the amount of debt service payment which exerts pressure on government budget constitutes more than one fourth of the total government expenditure. The theoretical prediction about the relationship between interest rate and government debt is still a matter of controversy. Empirical evidence of other countries on the relationship between interest rate and public debt has become inconclusive. This paper examines the relationship between long-term nominal interest rate and budget deficit variables in Nepal. The study finds the evidence that there exists positive but insignificant relationship between long-term nominal interest rate of government securities and budget deficit variables.

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    File URL: http://www.nrb.org.np/ecorev/pdffiles/vol17_art6.pdf
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    Bibliographic Info

    Article provided by Nepal Rastra Bank, Research Department in its journal NRB Economic Review.

    Volume (Year): 17 (2005)
    Issue (Month): (April)
    Pages: 113-133

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    Handle: RePEc:nrb:journl:v:17:y:2005:p:113-133

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    Web page: http://www.nrb.org.np/ecorev/
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    1. Silber, William L, 1970. "Fiscal Policy in IS-LM Analysis: A Correction," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(4), pages 461-72, November.
    2. Dwyer, Gerald P, Jr, 1985. "Federal Deficits, Interest Rates, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 655-81, November.
    3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    4. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    5. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February.
    6. Knot, Klaas & de Haan, Jakob, 1995. "Fiscal policy and interest rates in the European community," European Journal of Political Economy, Elsevier, vol. 11(1), pages 171-187, March.
    7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    8. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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