Budget Deficit and Economic Growth of Bangladesh: A VAR-VECM Approach
Janata Bank Journal of Money, Finance and Development, Vol 1, Number 2, 2014
13 Pages Posted: 18 Sep 2015 Last revised: 24 Oct 2016
Date Written: September 16, 2014
There are three schools of thought regarding economic effects of budget deficit: Neoclassical, Keynesian and Ricardian. Advocates of different school of thought elucidate different consequence of deficit budget. Empirical researches also failed to conclude concretely about the economic effect of budget deficit. In this study the relationship between budget deficit and economic growth has been explored empirically in the case of Bangladesh. Model developed by Shojai (1999) has been used where Gross Domestic Product (GDP) regressed with inflation rate, real interest rate, real effective exchange rate, budget deficit and gross investment. The sample comprises of time-series considering period of 1976-77 to 2011-12. An augmented Dickey-Fuller (ADF) and Johansen Co-integration test has been used for time series diagnosis. And according to the results of diagnostic tests, Vector Error Correction Model (VECM) has been used. Empirical result shows statistically significant negative effect of budget deficit over economic growth of Bangladesh i.e. GDP growth rate, which is conform with many other developing countries of the world. Further research could be conducted by taking into account cross section data, comparison among various political regimes, project management issues etc.
Keywords: Budget Deficit; Vector Error Correction Model (VECM); Gross Domestic Product (GDP); Inflation Rate; Real Effective Exchange Rate (REER); Real Interest Rate
JEL Classification: B22, C32, E31, H61, H62
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