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Budget deficit and growth: in search of ceiling for Bangladesh

Author

Listed:
  • Abdullah, S. M.
  • Azad, Abul Kalam
  • Siddiqua, Salina

Abstract

The impact of fiscal deficit measured by deficit in national budget on the growth of respective economy has been a widely researched area with plenty of debatable results. Shedding light in search of the optimum level of budget deficit, the current paper tried to contribute to the field of literature on this issue which is perhaps inadequate as far as Bangladesh economy is concerned. A total of 40 years of time series data spanning form 1975 – 76 to 2014 – 15 has been employed. Identification of integration order of the variables was examined performing Augmented Dickey Fuller (ADF), Phillips – Perron (PP) and Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests. Establishing the existence of cointegration among variables following the Johansen’s procedure, long run cointegrating vector has been estimated depending on VECM. The threshold has been identified solving the estimated long run cointegrating relationship for a local maximum. Findings can be summarized by saying that the long run impact of budget deficit on growth would remain positive; nevertheless, there would be no short run adjustment. Depending on the model definition and the particular exogenous variable(s), the threshold budget deficit has been measured to range between 4.55 to 5.0 percent of GDP.

Suggested Citation

  • Abdullah, S. M. & Azad, Abul Kalam & Siddiqua, Salina, 2018. "Budget deficit and growth: in search of ceiling for Bangladesh," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(4), pages 743-765, August.
    • Handle: RePEc:pdc:jrnbeh:v:14:y:2018:i:4:p:743-765
    DOI: http://dx.doi.org/10.15208/beh.2018.52
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    References listed on IDEAS

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    1. Adam, Christopher S. & Bevan, David L., 2005. "Fiscal deficits and growth in developing countries," Journal of Public Economics, Elsevier, vol. 89(4), pages 571-597, April.
    2. Siew-Peng Lee & Yan-Ling Ng, 2015. "Public Debt and Economic Growth in Malaysia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(1), pages 119-126.
    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Asrafuzzaman & Amit Roy & Sanat Das Gupta, 2013. "An Empirical Investigation of Budget and Trade Deficits: The Case of Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 3(3), pages 570-579.
    5. Siew-Peng Lee & Yan-Ling Ng, 2015. "Public Debt and Economic Growth in Malaysia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(1), pages 119-126, January.
    6. Vuyyuri, S. & Seshaiah, S. V., 2004. "Budget Deficits and Other Macroeconomic Variables in India," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(1).
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Md Mahbub Alam & Md Nazmus Sadekin & Rabiul Islam & Syed Moudud-Ul-Huq, 2022. "Effect of Deficit Financing on Economic Growth in Bangladesh: Cointegration and VECM Approach," FIIB Business Review, , vol. 11(2), pages 174-188, June.

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    More about this item

    Keywords

    Economic growth; budget deficit; threshold; cointegration; stationarity; VECM;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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