Determinants of Budget Deficit by EncompassingTechnique
Author: Bushra Perveen

There is considerable work on the issue of the budget deficit and has gained the attention of the researchers. Each researcher gave a different model including different variables for different countries without any proper model selection. The main objective of this study is to select an appropriate model of the budget deficit for South Asian countries including Pakistan, India, Bangladesh, and Sri Lanka. For this purpose, this study has used the seven non-nested economic models of the budget deficit, and encompassing methodology has been used to select appropriate model out of these seven models. We have used annual time series data from 2000 to 2018. Moreover, after selecting the specific models of Pakistan, India, Bangladesh, and Sri-Lanka we have employed the econometrics methodologies i.e Johansen and Juselious co-integration test, ARDL Bound testing approach, ECM regression, and VECM Granger causality approach to check the co-integrations and long-run association among the variables. VECM granger causality result shows the long run and bi-directional causality among the variables in all equations when we are taking each independent variable as a dependent variable one by one. In short-run bi-directional causality exists between budget deficit and economic growth, Money Supply (MS) and Expenditure (GEX) and Gross fixed capital formation (GCP) and money supply means both leads to each other. Furthermore, the uni-directional causality is running from budget deficit (BD) to MS, GEX, and GCP and from GEX to GDP. The results of the ARDL bound testing approach in the case of Pakistan show that the government size, trade openness, and Corruption are a statistically significant and positive impact on the budget deficit. The co-efficient of GDP, political stability is negative and statistically significant. The results in the case of Bangladesh show that the impact of law and order, POLITY is negative the budget deficit, while here the impact of GDP is positive on the budget deficit. However, in the case of Sri-Lanka Political stability and Corruption are positively associated with the budget deficit Economic growth has negative and statistically significant impact on the budget deficit In case of Bangladesh, Pakistan, India, and Sri Lanka. Supervisor:- Dr.Atiq-ur Rehman Co-Supervisor:- Ms. Uzma Zia

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Supervisor: Atiq Ur Rahman
Cosupervisor: Uzma Zia

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