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Crowding-in Effect of Budget Deficit: Evidence from Pakistan (1960-2005)

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  • Khan, Abdul Qayyum Khan
  • Khattak, Naeem U Rehman Khattak
  • Hussain, Anwar Hussain
  • Jehanzeb, Jehanzeb

Abstract

The paper critically analyzes the effect of budget deficit on private and public investment. Annual data for the period 1960-2005, taken from Economic Survey of Pakistan and International Financial Statistic is used for analysis. Simultaneous equation model is used for estimation. The study revealed that bank credit to private sector, government domestic bank borrowing, and foreign reserves have positive significant effect on money supply. Demand for money is positively related to out put and negatively to interest rate. Out put is positively related to consumption expenditure, private investment, public investment, balance of trade and negatively related to real interest rate. Private investment is positively related to out put, bank credit to private sector and negatively related to interest rate. The relationship between private investment and interest rate is statistically significant only at 10%, signifying that interest rate is not affecting private investment because of the greater return to private investors. Public investment is positively related to out put and foreign reserve and negatively to real interest rate. Both domestic bank borrowing and foreign borrowing to finance budget deficit crowded-in private and public investment with same elasticity, but foreign borrowing encourage foreign reserve outflow. Based on findings of the study it is recommended that domestic sources of financing including domestic non-bank borrowing and bank borrowing should encourage for budget deficit financing.

Suggested Citation

  • Khan, Abdul Qayyum Khan & Khattak, Naeem U Rehman Khattak & Hussain, Anwar Hussain & Jehanzeb, Jehanzeb, 2008. "Crowding-in Effect of Budget Deficit: Evidence from Pakistan (1960-2005)," MPRA Paper 42010, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:42010
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    References listed on IDEAS

    as
    1. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    2. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    3. Robert J. Barro & Paul Romer, 1993. "Economic Growth (1992)," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, July.
    4. Yellen, Janet L, 1989. "Symposium on the Budget Deficit," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 17-21, Spring.
    5. David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-249, Part I, M.
    6. Buiter, Willem H., 1977. "`Crowding out' and the effectiveness of fiscal policy," Journal of Public Economics, Elsevier, vol. 7(3), pages 309-328, June.
    7. M. Aslam Chaudhary & Ghulam Shabbir, 2004. "Macroeconomic Impacts of Monetary Variables on Pakistan’s Foreign Sector," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 9(1), pages 62-84, Jan-June.
    8. Nadeem A. Burney & Naeem Akhtar, 1992. "Government Budget Deficits and Exchange Rate Determination: Evidence from Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 871-882.
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    Cited by:

    1. Benish Naseem, 2017. "The Impact of Demand Management Policies On Domestic and Foreign Direct Investment in Case of Pakistan: A Time Series Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 6(4), pages 175-184, December.

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    More about this item

    Keywords

    Budget Deficit; Crowded-in; Private Investment; Public Investment;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • A10 - General Economics and Teaching - - General Economics - - - General

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