Domestic Borrowing Influence on Financial Development-Empirical study for Bangladesh

Abstract

This paper empirically tries to examine the repercussions of government internal-sourced borrowing over development of financial sector during timeline of 1980-2020 in Bangladesh. We have used Public domestic debt as a measure of internal borrowing, while credit to private sector was used as representing financial development (as proxy). Apart from that, this paper tries to analyze the influence of inflation, savings and taxes on financial development. The study used Unit-root test, Autoregressive Distributed Lagged-ARDL bound approach and Error correction statistical (ECM) techniques. The econometric technique confirms the long-run association of private sector credit with public domestic debt. The estimated model implies public domestic debt positively impacts to credit to private sector. The result shows 1 percent increase in domestic debt impacted private sector credit by 0.34 percent. The other explanatory variables except inflation have significant co relation with dependent variable. The ECM term indicates the model adjustment from short-term shocks towards long-run at 17 percent speed.