Public Expenditure Backed Fiscal Deficit and Interaction with other Dominant Macro Indicators: Insight for the Case of Bangladesh

Abstract

This paper specially dedicated to trace relationship of fiscal deficit with the recent surge in GDP growth, inflation, Money supply etc. in the context of Bangladesh as in many cases for other countries it has been found that this fiscal deficit resulted in mixed effect in terms of these macro dominant variables. To this end, data from 1990 to 2019 has been used to find systematic intuitions in the period under review. From the technical side, Augmented Dickey-Fuller (ADF) test for checking stationary in the data and Johansen Co-integration test for the existence of the possible long run relationship (if any), VECM and Variance Decomposition have been used for time series diagnosis. Empirical result says that the variables of this model are I (1) and outlined one cointegrating relationship among these. ECM traces that variables simultaneously act to converge to the said long run equilibrium in oscillatory nature. Pair-wise Granger Causality Test finds a unidirectional causal relationship in the form of GDP to budget deficit. As well as it also finds a unidirectional causal relationship between CPI and money supply and deficit for the case of BD economy.