Budget Deficit and Economic Growth Nexus in Bangladesh: An ARDL Approach

Abstract

This investigation delineates the complex interplay between fiscal deficits and economic growth in Bangladesh from 1980 to 2022, utilizing an Autoregressive Distributed Lag (ARDL) model. It meticulously assesses how foreign direct investment, fiscal disparities, and economic openness influence GDP per capita. The analysis reveals that fiscal deficits may stimulate economic activity in the short term under certain conditions; however, over an extended period, they are likely to increase borrowing costs and reduce private sector investment. This bifurcated impact underscores the intricate role of fiscal policies within economic dynamics. The study proposes a strategy to capitalize on the short-term benefits of fiscal deficits while maintaining long-term budgetary integrity. The primary limitations involve reliance on historical data and the ARDL model's inability to encompass all economic interactions, suggesting that subsequent research could adopt more advanced methodologies or contemporary data sets. This study contributes to our understanding of the conditional effects of fiscal policies in developing nations, such as Bangladesh. It offers policy recommendations to optimize economic outcomes derived from budgetary deficits.