This paper aims to investigate the impact of selected macro-economic variables like real effective exchange rate (REER), GDP, inflation (INF), the volume of trade (TR) and money supply (M2) on-budget deficit (BD) in Bangladesh over the period of 1980–2018.
By using secondary data, the paper uses the Vector Error Correction Model (VECM) and Granger Causality test. Johansen’s cointegration test is used to examine the long-run relationship among the variables under study.
Johansen’s cointegration test result shows that there exists a positive long-run relationship of selected macroeconomic variables (real effective exchange rate, inflation, the volume of trade and money supply) with the budget deficit, whereas GDP has a negative one. The short-run results from the VECM show that GDP, inflation and money supply have a negative relationship with the budget deficit. The Granger Causality test results reveal unidirectional causal relationships running from BD to REER; TR to BD; M2 to BD; GDP to REER; M2 to REER; INF to GDP; GDP to TR; M2 to GDP and bidirectional causal relationship between GDP and BD; TR and REER; M2 and TR.
Bangladesh has been experiencing a budget deficit since 1972 due to a decline in sources of revenue. This study contributes to the empirical debate on the causal nexus between macroeconomic variables and budget deficits by employing VECM and Granger Causality approaches.
This research received no financial support from any funding agency in the public, commercial, or not-for-profit sectors.
Alam, M.M., Sadekin, M.N. and Saha, S.K. (2020), "The impact of macroeconomic variables on the budget deficit in Bangladesh: an econometric analysis", South Asian Journal of Business Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/SAJBS-05-2020-0141
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