TEL  Vol.5 No.5 , October 2015
Fiscal Imbalances and Interest Rate Change in Pakistan: A Co-Integration Analysis
The study investigated the relationship among fiscal deficit, public debt, inflation, international interest rates and the interest rate change in Pakistan using time series data for the period 1981-2011. Augmented Dickey Fuller Unit root test was used to check stationarity of time series data. The study employed co-integration approach to check the long-run relationship among variables. The findings of the study showed a positive and significant relationship between explanatory variables and interest rate change. The study suggested that the fiscal deficit, public debt and double digit inflation should be controlled in order to decrease the interest rate and interest rate fluctuation in Pakistan.

Cite this paper
Islam, Z. , Ali, A. , Baig, I. , Baig, S. , Hashim, M. and Zia-Ur-Rehman, M. (2015) Fiscal Imbalances and Interest Rate Change in Pakistan: A Co-Integration Analysis. Theoretical Economics Letters, 5, 616-623. doi: 10.4236/tel.2015.55072.
[1]   Gigineishvili, N. (2011) Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter? IMF Working Paper No. 11, African Department, 176.

[2]   Bonga-Bonga, L. (2011) Budget Deficit and Long-Term Interest Rates in South Africa. African Journal of Business Management, 6, 3954-3961.

[3]   ADB (2004) Pakistan Economic Update (July 2003-June 2004). Asian Development Bank, Mandaluyong.

[4]   Cohen, D. and Garnier, O. (1991) The Impact of Forecasts of Budget Deficits on Interest Rates in the United States and Other G-7 Countries, Federal Reserve Board.

[5]   Canzoneri, M.B., Cumby, R.E. and Diba, B.T. (2002) Should the European Central Bank and the Federal Reserve Be Concerned about Fiscal Policy? Federal Reserve Bank of Kansas City, 333-389.

[6]   Laubauch, T. (2003) New Evidence on the Interest Rate Effects of Budget Deficits and Debt. Board of Governors of the Federal Reserve System.

[7]   Gale, W.G. and Orszag, P.R. (2003) Economic Effects of Sustained Budget Deficits. National Tax Journal, 56, 463-485.

[8]   Bashir, R. (2004) Pakistan’s Fiscal Deficit.

[9]   Dai, Q. and T. Philippon. (2004) Government Deficits and Interest Rates: A No-Arbitrage Structural VAR Approach. New York University, New York.

[10]   Kameda, K. (2008) Budget Deficits, Government Debt and Interest Rates in Japan: An Analysis Using Published Budgetary Forecasts. Kwansei Gakuin University, Nishinomiya.

[11]   Engen, E. and Hubbard, G. (2004) Federal Government Debt and Interest Rates. American Enterprise Institute, Working Paper No. 105, Washington DC.

[12]   Shapiro, M.D. (2005) Federal Government Debt and Interest Rates. NBER Macroeconomics Annual, 19, 83-160.

[13]   Gosselin, M.A. and Lalonde, R. (2005) MUSE: The Bank of Canada’s New Projection Model of United States Economy. Bank of Canada Technical Report No. 6.

[14]   Utami, S.T. and Inanga, E.L. (2009) Exchange Rates, Interest Rates, and Inflation Rates in Indonesia: The International Fisher Effect Theory. International Research Journal of Finance and Economics, 26, 151-169. http://www.eurojournals. com/finance.htm

[15]   Brzezina, M.B. (2002) The Relationship between Real Interest Rates and Inflation. National Bank of Poland Working Papers 23, National Bank of Poland, Economic Institute.

[16]   Obi, B. and Nurudeen, A. (2009) Does Fiscal Deficit Raise Interest Rates in Nigeria? A Vector Autoregression Approach. Journal of Applied Quantitative Methods, 4, 3.

[17]   Hall, G.J and Sargent, T.J. (2010) Interest Rate Risk and Other Determinants of Post WWII. US Government Debt/ GDP Dynamics, October 26, 2010.

[18]   Adjei, C.K.K., Mayer, R.W. and Chien, W.W. (2012) Determinants of Long-Term Interest Rate in the United States. Journal of Business & Economics Research, 10, 5.

[19]   Haq, A. and Aurangze, B. (2012) Determinants of Inflation in Pakistan. Universal Journal of Management and Social Sciences, 2, 4.

[20]   Dickey, D.A., Bell, W.R. and Miller, R.B. (1986) Unit Root in Time Series Models: Tests Implications. The American Statistician, 44, 12-24.

[21]   Hjalmarsson, E. and Osterholm, P. (2007) Testing for Co-Integration Using the Jhoansen Methodology When Variables are Near Integrated. Board of Governors of the Federal Reserve System. International Finance Discussion Papers Number 915, December 2007.

[22]   Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inferences on Co-Integration with Application to the Demand for Money. Oxford Bulletin of Econometrics and Statistic, 52, 170-209.

[23]   Engle, R.F. and Granger, C.W.J. (1987) Co-Integration and Error Correction: Representation, Estimation and Testing. Econometrica, 35, 251-276.

[24]   Pesaran, M.H., Shin, Y. and Smith, R.J. (2000) Structural Analysis of Vector Error Correction Models with Endogenous I(1) Variables. Journal of Econometrics, 97, 293-343.