BUDGET DEFICITS AND INTEREST RATES: AN EMPIRICAL ANALYSIS FOR PAKISTAN

This paper empirically examines long run relationship between nominal interest rates and budget deficits for Pakistan using quarterly time-series data for the period 1960 to 2005. We test the conventional crowding-out view against the Ricardian deficit neutrality alternative. Regression results show that budget deficits do not have significant effect on nominal interest rates. These results reveal the existence of the Ricardian deficit neutrality in Pakistan. While budget deficit-GDP ratio has significant positive impact on nominal interest rates. These findings support the conventional wisdom of crowding-out. The results are also validated by the Granger causality tests.