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Volume 14
Issue 4
Online publication date 2018-08-17
Title Budget deficit and growth: in search of ceiling for Bangladesh
Author S. M. Abdullah, Abul Kalam Azad, Salina Siddiqua
The impact of fiscal deficit measured by deficit in national budget on the growth of respective economy has been a widely researched area with plenty of debatable results. Shedding light in search of the optimum level of budget deficit, the current paper tried to contribute to the field of literature on this issue which is perhaps inadequate as far as Bangladesh economy is concerned. A total of 40 years of time series data spanning form 1975 – 76 to 2014 – 15 has been employed. Identification of integration order of the variables was examined performing Augmented Dickey Fuller (ADF), Phillips – Perron (PP) and Kwiatkowski–Phillips–Schmidt–Shin (KPSS) tests. Establishing the existence of cointegration among variables following the Johansen’s procedure, long run cointegrating vector has been estimated depending on VECM. The threshold has been identified solving the estimated long run cointegrating relationship for a local maximum. Findings can be summarized by saying that the long run impact of budget deficit on growth would remain positive; nevertheless, there would be no short run adjustment. Depending on the model definition and the particular exogenous variable(s), the threshold budget deficit has been measured to range between 4.55 to 5.0 percent of GDP. 
Key Words: Economic growth, budget deficit, threshold, cointegration, stationarity, VECM
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Keywords Economic growth, budget deficit, threshold, cointegration, stationarity, VECM
Pages 743-765
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