Empirical Analysis of Fiscal Sustainability and Optimal Level of Debt in Pakistan

Through the current study it’s been tried to discuss that how fiscal sustainability is impacted by the debt which is taken by countries in order to push their economy towards prosperity and growth in Pakistan. Because the economy is considering vulnerable in terms of Public debt due to huge fiscal deficit in the economy. The ARDL approach is being applied by taking GDP as dependent variable while public debt, total revenues, government expenditures and interest rate are been taken as independent variable. The findings of the study suggested that there is strong and significant relationship exist between focused variables. Public debt is negatively associated with GDP in both short run and long run, while government expenditure give positive and significant relationship with GDP and interestingly total revenue give negative significant relationship in long run that supported the argument that the high revenues in developing nations inversely affects the investment that is pillar of GDP, so it adversely affected. The interest rate is positively significant in long run but in short run its negatively related with GDP because it affects cost of capital. The findings of study attract the attention of policy makers that we need either debt reduction strategies or either to minimize the gap between public revenues and public expenditures to promote sustain economic growth in the economy.

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Estimating the Optimal Level of Public Debt for Economic Growth: An Evidence from Pakistan

Quest Journal of Management and Social Sciences ◽

10.3126/qjmss.v1i2.27441 ◽

2019 ◽

Vol 1 (2) ◽

pp. 222-232

Author(s):

Muhammad Ashfaq ◽

Ihtsham UlHaq Padda

Keyword(s):

Economic Growth ◽

Interest Rate ◽

Public Debt ◽

Developing Economies ◽

Optimal Level ◽

Series Data ◽

Fiscal Deficit ◽

Long Run ◽

Short Run ◽

Bound Test

Background: In underdeveloped economies, the role of public debt is very vital with the intention of achieving a desirable level of output, employment and sustainability in long run economic growth. Fiscal deficit in developing economies is a common phenomenon because of low tax base and high imports. Economy of Pakistan is also facing fiscal deficit and trade deficit since its independence, so it relies on public debt to fill this fiscal gap. Objectives: The objective of this study is to estimate the optimal level of public debt for economic growth. Methods: This study explores the nonlinear relationships between public debt and economic growth of Pakistan by using time series data. The ARDL bound test technique is used to estimate the short-run and long-run impact of debt on economic growth. The growth maximizing level of debt is also estimated. Results: According to the estimated parameters, the optimal level of public debt is 60% of GDP. It also indicates that increase in government borrowings will raise economic growth in Pakistan in the long run. However, in the short run, if public debt increases it will boost economic growth after some levels of public debt and it will start declining. Conclusions: This study implies that public debt must be discouraged beyond optimal level of debt, as above optimal level it adversely affects the economic growth. Implications: The implication of the findings of the study is that higher interest rate curbs economic growth, therefore, present policy of keeping high interest rate by government should be revisited. Recommendations: Government of Pakistan should focus on fiscal and current account deficit, which are the main cause of increasing public debt, because higher public debt is not good for economic growth. Also, suitable fiscal policy is needed to control the debt burden and to get rid-off Ponzi game of debt from Pakistan by strictly enforcing the Fiscal Responsibility and Debt Limitation Act 2005.

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Effects of Government Expenditure on Private Investment in Nigerian Economy (1980–2016)

Emerging Economy Studies ◽

10.1177/2394901518795067 ◽

2018 ◽

Vol 4 (2) ◽

pp. 147-156

Author(s):

Taiwo Akinlo ◽

Olusola Joel Oyeleke

Keyword(s):

Interest Rate ◽

Positive Impact ◽

Government Expenditure ◽

Private Investment ◽

Correction Model ◽

Long Run ◽

Short Run ◽

The Government ◽

The Interest Rate ◽

The Relationship

This study examined the effect of government expenditure on private investment in Nigeria during the period 1980–2016. The error correction model analysis was used in the study to analyze the relationship between the two variables. The study found that there is a long-run relationship among the variables and that the interest rate and inflation have negative but significant impact on private investment in the long run. On the other hand, government expenditure has positive but insignificant impact on private investment in the long run. In the short run, government expenditure and interest rate have a significant positive impact on private investment in Nigeria, while GDP per capita and inflation negatively impact private investment. The study concluded that there is the need for the government to increase its expenditure particularly on the provision of more infrastructural facilities as this will attract more investment from within and outside the country.

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INFLASI DARI SUDUT PANDANG MONETER DAN FISKAL (STUDI KASUS SUMATERA BARAT)

Jurnal Kajian Ekonomi dan Pembangunan ◽

10.24036/jkep.v1i1.5357 ◽

2019 ◽

Vol 1 (1) ◽

pp. 131

Author(s):

Zul Azhar ◽

Alpon Satrianto ◽

Nofitasari Nofitasari

Keyword(s):

Interest Rate ◽

Money Supply ◽

Government Spending ◽

Descriptive Research ◽

Distributed Lag ◽

Long Run ◽

Negative Effect ◽

Short Run ◽

The Interest Rate ◽

Positive Effect

This study aims to analyze the effect of money supply M2, interest rate, government spending and local tax on the inflation in West Sumatera. This type of research is descriptive research and secondary datain the form of time-series from quartely 1 2007 to 2017 quartely 4 using the method of Autoregresive Distributed Lag analysis. The results of this study indicate that money supply in the long run have a significant and positive effect on inflation West Sumatera. In the short run and long run the interest rate has a significant and positive effect on inflation in West Sumatera. Government spending in the Long run has a significant and negative effect on inflation in West Sumatera. Based on the result of this study can be concluded that there is inflation in West Sumatera is monetery of phenomenon in the long run.

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Impact of Public Debt, Deficit and Debt Financing on Private Investment in a Large Country: Evidence from the United States

World Journal of Applied Economics ◽

10.22440/wjae.6.2.3 ◽

2020 ◽

Vol 6 (2) ◽

pp. 139-161

Author(s):

Amir Kia

Keyword(s):

Public Debt ◽

Public Investment ◽

Government Expenditure ◽

Private Investment ◽

Adjustment Costs ◽

The United States ◽

Direct Impact ◽

Large Country ◽

Long Run ◽

Short Run

This paper analyses the direct impact of fiscal variables on private investment. The current literature ignores one or more fiscal variables and, in many cases, the foreign financing of debt. In this paper, an aggregate investment function for an economy in which firms incur adjustment costs in their investment process is developed. The developed model incorporates the direct impact of government expenditure, public debt and investment, deficits and foreign-financed debt on private investment. The model is tested on US data. It is found that public investment does not have any impact on private investment, but government expenditure, deficit, debt and foreign-financed debt crowd out private investment over the long run. However, deficit crowds in the private investment over the short run.

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The Optimal Level of Debt in an OLG Model with Endogenous Fertility

German Economic Review ◽

10.1111/j.1468-0475.2011.00534.x ◽

2011 ◽

Vol 12 (3) ◽

pp. 351-369 ◽

Cited By ~ 4

Author(s):

Luca Spataro ◽

Luciano Fanti

Keyword(s):

Public Debt ◽

Optimal Level ◽

Child Rearing ◽

Olg Model ◽

Endogenous Fertility ◽

Ceteris Paribus ◽

Long Run ◽

The Interest Rate ◽

The One ◽

The Cost

Abstract In the present work we extend Diamond’s OLG model by allowing for endogenous fertility and look at the consequences of such an extension on the rules for optimal public debt issuing. In particular, we show that the condition according to which the rate of growth of population should be higher than the interest rate is no longer sufficient for obtaining welfare improvements via debt increases and that the level of optimal debt is, ceteris paribus, lower than the one arising with exogenous fertility. Finally, a sensitivity analysis shows that the optimal level of debt is higher the lower the capital share, the higher individuals’ degree of patience, the bigger the child-rearing cost and the lower the preference for children. On policy grounds we argue that debt-tightening policies may be optimal in the long run provided that the cost of rearing children does not increase (or, if anything, does decrease).

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The Interest Rate, Learning, and Inventory Investment

The American Economic Review ◽

10.1257/0002828043052295 ◽

2004 ◽

Vol 94 (5) ◽

pp. 1303-1327 ◽

Cited By ~ 29

Author(s):

Louis J Maccini ◽

Bartholomew J Moore ◽

Huntley Schaller

Keyword(s):

Interest Rate ◽

Regime Switching ◽

Real Interest Rate ◽

Decision Rules ◽

Negative Relationship ◽

The Real ◽

Long Run ◽

Inventory Investment ◽

Short Run ◽

The Interest Rate

This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock-adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate.

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Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach

Journal of Risk and Financial Management ◽

10.3390/jrfm14060277 ◽

2021 ◽

Vol 14 (6) ◽

pp. 277

Author(s):

Muhammad Azmat Hayat ◽

Huma Ghulam ◽

Maryam Batool ◽

Muhammad Zahid Naeem ◽

Abdullah Ejaz ◽

...

Keyword(s):

Interest Rate ◽

Granger Causality ◽

Wavelet Transformation ◽

Multi Scale ◽

Long Run ◽

Causality Tests ◽

Short Run ◽

The Interest Rate ◽

The Relationship ◽

Cross Wavelet

This research is the earliest attempt to understand the impact of inflation and the interest rate on output growth in the context of Pakistan using the wavelet transformation approach. For this study, we used monthly data on inflation, the interest rate, and industrial production from January 1991 to May 2020. The COVID-19 pandemic has affected economies around the world, especially in view of the measures taken by governmental authorities regarding enforced lockdowns and social distancing. Traditional studies empirically explored the relationship between these important macroeconomic variables only for the short run and long run. Firstly, we employed the autoregressive distributed lag (ARDL) cointegration test and two causality tests (Granger causality and Toda–Yamamoto) to check the cointegration properties and causal relationship among these variables, respectively. After confirming the long-run causality from the ARDL bound test, we decomposed the time series of growth, inflation, and the interest rate into different time scales using wavelet analysis which allows us to study the relationship among variables for the very short run, medium run, long run, and very long run. The continuous wavelet transform (CWT), the cross-wavelet transform (XWT), cross-wavelet coherence (WTC), and multi-scale Granger causality tests were used to investigate the co-movement and nature of the causality between inflation and growth and the interest rate and growth. The results of the wavelet and multi-scale Granger causality tests show that the causal relationship between these variables is not the same across all time horizons; rather, it is unidirectional in the short-run and medium-run but bi-directional in the long-run. Therefore, this study suggests that the central bank should try to maintain inflation and the interest rate at a low level in the short run and medium run instead of putting too much pressure on these variables in the long-run.

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Appraisal of Determinants of Real Exchange Rate Alignment in Kenya

Account and Financial Management Journal ◽

10.47191/afmj/v5i10.04 ◽

2020 ◽

Vol 03 (10) ◽

Author(s):

Evans Kipchumba Kipyatich ◽

Keyword(s):

Exchange Rate ◽

Exchange Rates ◽

Real Exchange Rate ◽

Public Debt ◽

Real Exchange Rates ◽

Government Expenditure ◽

Explanatory Variables ◽

Long Run ◽

Short Run ◽

Productivity Differentials

Real exchange rate is an important indicator of competitiveness in the foreign trade of a country. Any changes in real exchange rates would therefore lead to fluctuations in capital flows. It is therefore important to align real exchange rates within the equilibrium levels to avoid negative consequences on the economy. This study sought to understand the determinants of real exchange rate alignment in Kenya using annual data from 1988 to 2019 using Autoregressive Distribution Lag (ARDL) model. The study estimated the long run and short run dynamics of real exchange rate alignment in Kenya. The ARDL bounds test confirmed that a long run relationship exists between real exchange rate and the explanatory variables. Real exchange rate was the dependent variable while the explanatory variables were external public debt, government expenditure, interest rate differentials and productivity differentials. The results revealed that external public debt, government expenditure and productivity differentials are significant determinants of real exchange rate alignment. Interest rate differential was found to be not significant. The Error Correction Model was found to be significant and having the right (negative) sign. This shows that Kenya’s real exchange rate adjusts to the long run equilibrium as a response short run shocks of previous periods. The speed of adjustment was found to be 86 percent per year. Both the long run and error correction models were found to be stable as per the CUSUM and CUSUMQ tests. The models also passed all the diagnostic tests including serial correlation, normality, heteroscedasticity, and multicollinearity.

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An Investigation into the Interest Elasticity of Demand for Money in Developing Countries: A Panel Data Approach

International Journal of Economics and Finance ◽

10.5539/ijef.v9n3p69 ◽

2017 ◽

Vol 9 (3) ◽

pp. 69 ◽

Cited By ~ 1

Author(s):

Felix S. Nyumuah

Keyword(s):

Developing Countries ◽

Panel Data ◽

Interest Rate ◽

Equatorial Guinea ◽

African Countries ◽

Demand For Money ◽

Elasticity Of Demand ◽

Long Run ◽

Short Run ◽

The Interest Rate

The issue as to whether the interest rate influences the demand for money in developing countries is still controversial. The aim of this study is to attempt to resolve this controversy. The study uses panel data from eight African countries to look at the interest elasticity of demand for money in developing countries. The countries used in the study are Angola (ANG), Equatorial Guinea (EQG), Gambia (GMB), Guinea-Bissau (GBS), Kenya (KNY), Mali (MLI), Nigeria (NGR) and Uganda (UGD). Overall, the study finds the interest rate to be inelastic in the short run but elastic in the long run. This finding suggests that monetary policy is ineffective in developing countries in the long run.

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Drivers of Inflation in the Economy of Bahrain

International Journal of Economics and Finance ◽

10.5539/ijef.v8n3p178 ◽

2016 ◽

Vol 8 (3) ◽

pp. 178

Author(s):

Ibrahem H. Al-Ezzee

Keyword(s):

Exchange Rate ◽

Interest Rate ◽

Correction Term ◽

Consumer Price Index ◽

Government Expenditure ◽

Cointegrating Vector ◽

Long Run ◽

Integration Test ◽

Effective Exchange ◽

Short Run

The study tries to recognize the macroeconomic variables responsible for inflation in Bahrain during the period 1980-2010. For this purpose, co-integration test were used in the empirical analysis. Using Augmented Dickey-Fuller (ADF) Phillips Perron (PP) tests, the variables of the study revealed to be integrated of the order one 1(1) at first difference. Cointegration test was used to state the existence or otherwise of a cointegrating vector in the variables. Trace and Maximum Eigen test value point out co-integration at 5% level of significance pointing to the fact that the variables have a long-run relationship.The paper found that inflation in the short-run is effected by M2, GEXP, and WACPI supporting the long run analysis. The signs of NEER and IR are not as expected. The error correction term is negative and significant at 1%, so the model is stable and supporting the Co-integration results.The variance decompositions (VDs) approach is used to capture the relative importance of various shocks and their influences on our variable of inflation. The relative variance of inflation is due the exchange rate and interest rate. The results show that shocks to the CPI itself, Nominal Effective Exchange Rate NEER, Nominal Interest Rate NIR, M2, Government Expenditure GEXP, and Consumer Price Index of Main Partners WACPI over all horizons.

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