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Do Budget Deficits Raise Interest Rates in Nepal?

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  • Shoora B. Paudyal

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    (Economics Department, Tribhuvan University)

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    Abstract

    This paper examines short term and long term relationship between nominal interest rates and budget deficits for Nepal using the data for 1988 to 2011. Engle and Granger Error Correction Mechanism (ECM) is applied for the analysis. The regression results show that budget deficits and budget deficits- GDP ratio do not have significant effects on nominal interest rates in Nepal. So, budget deficits in Nepal are interest rates neutral. We come to the conclusion that budget deficits are not crowding out the private investment in this country. However, the deficits have been increasing the burden of loans financing current consumption at the expense of the future consumption, which will have serious implications on the growth of economy.

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    File URL: http://www.nrb.org.np/ecorev/pdffiles/vol25-1_art4.pdf
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    Bibliographic Info

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

    Volume (Year): 25 (2013)
    Issue (Month): 1 (April)
    Pages: 51-66

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    Handle: RePEc:nrb:journl:v:25:y:2013:i:1:p:51-66

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    Web page: http://www.nrb.org.np/ecorev/
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    Keywords: Budget deficits; interest rates; crowding out; Ricardian neutrality; Engle and Granger ECM;

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    1. Leanne Ussher, 1998. "Do Budget Deficits Raise Interest Rates? A Survey of the Empirical Literature," Working Papers 0005 Classification- JEL:, Department of Economics, Queens College of the City University of New York.
    2. ,, 2009. "Public Finance and Public Choice: Analytical Perspectives," OUP Catalogue, Oxford University Press, edition 3, number 9780199234783.
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