| Author | Solaiman, Abu Yousuf Muhammad |
| Note | project submitted in partial fulfillment of the requirements for the
Degree of Professional Master in
Banking and Finance, School of Management |
| Publisher | Asian Institute of Technology |
| Abstract | Public borrowing has a close relation with private investment. The relation is perceived to be negative in most policy statements and some economic media. But in the context of theory, this relation cannot be precisely said (Fayed, 2012). Deficit financing is defined as an excess of expenditure over income by the government. Very few governments in the world spend within their incomes. Even some developed economies also at times turn out to be over-spenders. The resource for expanding expenditure comes normally from public borrowing. Some countries, after experiencing adverse effect of deficit financing or learning bad lessons from such financing, passed balanced budget acts compelling the governments to remain within their incomes while spending public money. As Bangladesh is a developing nation, it needs more public investment. To finance the increasing demand for investment, government of Bangladesh borrows money from the banking sector. We need to analyze whether this public investment by bank borrowing crowd-out or crowd-in the private investment in Bangladesh. For this, I have used the data on private investment, public borrowing, govt. consumption expenditure, govt. capital expenditure, GDP growth rate and lending interest rate to analyze this phenomenon. I also want to see whether govt. consumption expenditure and govt. capital expenditure have significant impacts on private investment. After performing several econometric tests like unit root test, Cointegration test and error correction model, I have found that public borrowing has a positive impact on private investment. In other words, public borrowing does not crowd out private investment in Bangladesh rather it has a crowd in impact. This may be because of excess liquidity prevailing in the financial channel. We have observed that the liquid assets in the financial system is almost double than the minimum liquid assets required by the supervision authority. This may be the implication of this crowding in phenomenon in Bangladesh. The other finding is that govt. consumption has also a positive impact on private investment. That is to say, public expenditures also have some crowding in impact on boosting the private investment. The repercussion indicates that government consumption spending escalates the aggregate demand in the economy and this in turn induces private investors to invest more. The final finding includes the affirmative influence of government capital expenditure. The inference signposts that this sort of govt. spending provides a stronger investment infrastructure, a developed transportation system, an improved power supply system and above all an enriched framework to invest. |
| Year | 2016 |
| Type | Project |
| School | School of Management (SOM) |
| Department | Other Field of Studies (No Department) |
| Academic Program/FoS | Master of Business Administration (MBA) (Publication code=SM) |
| Chairperson(s) | Roy, Shyamal |
| Examination Committee(s) | Venkatesh, Sundar ; Wijewardena, Weerakoon A. ; Zimmermann, Willi |