Impact of Total, Internal and External Government Debt on Interest Rate in Pakistan

The objective of the study is to examine impact of total, internal and external government debt on nominal interest rate in Pakistan. To attain these objectives, the study used annual time series data from 1973 to 2016. The study used loanable fund theory as theoretical model and ARDL bound testing approach for cointegration and Granger causality test to estimate the results. The results of the study found negative relation between total government debt, external debt and nominal interest rate in long run, while the study found no evidence of long run relation between internal government debt and nominal interest rate. In short run, positive relation exists between total government debt and nominal interest rate, while negative relation exists between external government debt and nominal interest rate. The results found unidirectional causality between total government debt and nominal interest rate. Government decrease nominal interest rate to lessen the repayment of government borrowing, which lead to decrease in interest rate. Reforms should be made to lessen the burden of government debt and to stabilize the interest rate