Impact of Fiscal Deficit and Government Debt on Interest Rate in Pakistan

Abstract

The current study was conducted in the year 2014 in Pakistan to investigate the impact of fiscal deficit and government debt on interest rate.  Data on certain macroeconomic variables like fiscal deficit, government debt, GDP per capita, money supply and volume of trade etc from the year 1990 to 2012.  The study also has tried to find out that how the interest rate in the country is affected by the government debt and fiscal deficit. Augmented Dickey Fuller test was run to address the stationary issue in the data, and then Ordinary Least Square (OLS) model test was run to check the relationship among the variables. Two models were set in the study. In the first model, the relationship of GDP per capita, money supply, total debt servicing and volume of trade showed a significant relationship with fiscal deficit, while in the second model the relationship of inflation, fiscal deficit, money supply, government debt and public debt showed a significant relationship with the interest rate.

Keywords: Fiscal deficit, government debt, GDP per capita, ADF, Interest