Deficit Financing in LDCs: Evidence From South Asia

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Deficit Financing in LDCs: Evidence From South Asia

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Chowdhury, Khorshed () (University of Wollongong)

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.

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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp04-18.

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Length: 25 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:uow:depec1:wp04-18

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Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
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Fax: +612 4221-3725
Web page: http://www.uow.edu.au/commerce/econ/
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Find related papers by JEL classification:
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
H6 - Public Economics - - National Budget, Deficit, and Debt
O1 - Economic Development, Technological Change, and Growth - - Economic Development
O2 - Economic Development, Technological Change, and Growth - - Development Planning and Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-11-30 (All new papers)

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Metin, Kivilcim, 1995. "An Integrated Analysis of Turkish Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 513-31, November.

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