The Effect of Budget Deficit on Interest

Ibrahim S. Al-Omar, Mohammad A. Alawin, Diana B. Al-Husari

Abstract


This study combines two important economic variables; interest rate and budget deficit. Interest rate plays an important role in the monetary policy and is one of the most important variables that affects the decisions of the whole economy including individuals, business sector and government, in order to choose the best option of saving or investment. On the other hand, budget deficit is a very important indicator which measures the financial performance of the government.
As a result of many local and foreign circumstances that affected the Jordanian economy, there were several imbalances in the structure of the economy as well as imbalances in the financial structures. These imbalances appear in some aspects such as: the public budget deficit, a reduction in the level of standard living, and a breakdown in some economic development programs. Accordingly, this study comes to measure the relationship between the budget deficit and the interest rate on long term deposits in Jordan during the period (1996-2008).
The study used the Ordinary Least Squares (OLS) method to estimate the econometric models, after implementing the necessary tests to make sure that it is the appropriate methodology. The study concluded that the budget deficit has a positive impact on the interest rate. However, this effect was not statistically significant. This result supports the idea that government expenditure or borrowing does not pursue crowding effect on the private sector. Therefore, we can attribute the behavior of private sector when it abstains from borrowing from commercial banks to other factors such as: the conditions of the economy and the restrictions imposed by the commercial banks on lending money.

Keywords


Budget Deficit, Interest Rate, Cointegration, Jordan

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