Why is it so Hard to Finance Budget Deficits? Problems of a Developing Country

Posted: 12 May 2005

See all articles by Andrew Feltenstein

Andrew Feltenstein

Georgia State University - Department of Economics

Shigeru Iwata

University of Kansas

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines possible ways for a developing country to finance budget deficits by drawing on domestic resources. We do so by analyzing Pakistan's National Savings Scheme (NSS). The NSS has a number of unusual attributes, and its impact upon the economy of Pakistan is not clear. Given Pakistan's chronic difficulties with the public sector deficit, the NSS, which is a key instrument in financing that deficit, is of great importance. We use an econometric model to analyze the relationship between the demands for NSS deposits and various other financial instruments in Pakistan. In particular, we look at the relationship between deposits in the National Savings Scheme, bank deposits, and foreign currency deposits.

We conclude that bank deposits and NSS deposits appear to be net substitutes, as do NSS and foreign currency deposits. Bank deposits and foreign currency deposits, however, seem to be neither substitutes nor complements. Also, the estimated income derivative of the demand for bank deposits is negative, while that of foreign currency deposits is positive. For the NSS it is not significantly different from zero. Finally, is evidence that foreign currency deposits are a net substitute for NSS deposits. Thus, there is some empirical support for the belief that foreign currency deposits have absorbed a part of the demand for NSS deposits. Accordingly, the availability of these foreign currency deposits may have reduced the ability of the government to finance itself.

Keywords: Domestic resources, NSS, foreign currency

JEL Classification: H55, H61, O23

Suggested Citation

Feltenstein, Andrew and Iwata, Shigeru, Why is it so Hard to Finance Budget Deficits? Problems of a Developing Country. Available at SSRN: https://ssrn.com/abstract=717141

Andrew Feltenstein (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
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Shigeru Iwata

University of Kansas ( email )

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Lawrence, KS 66045
United States
(785) 864-2867 (Phone)
(785) 864-5270 (Fax)

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