Global Advanced Research Journal of Management and Business Studies (GARJMBS) ISSN: 2315-5086 February 2012 Vol. 1(1), pp 006-029

Copyright © 2012 Global Advanced Research Journals                 

 

Original Research Articles

Fiscal deficit and nominal interest rate determination in Cameroon: An application of the loan able funds model

Armand Gilbert NOULA

Senior Lecturer of the Department of Economics Analysis and Policy, Faculty of Economics and Management, University of Dschang - Cameroon. Email: armandgilbert@yahoo.fr

Accepted 6 February 2012

Abstract

It is a widely held view that budget deficits influence nominal lending interest rates. In this study, the model for the determination of interest rates, which is applicable to small semi-open economies, is presented. The model (loanable funds model) is tested by using annual time series data from 1974-2009 in the context of Cameroon. This study is relevant for the Cameroonian economy, given that it has experienced very large fluctuations in its budget deficits and nominal lending rates under the period of study and especially after the liberalisation process. In this study, regression analysis applied to annual time series data has revealed a significant positive association between budget deficits and domestic nominal lending interest rates for the period under study. Also, we find a bi-directional causality between budget deficits and nominal interest rates in Cameroon.We conclude from the analysis that policy makers in Cameroon should reconsider the budget deficit policy and its means of financing.

Keyswords: Budget Deficits, Interest Rate, Loanable Funds Models,  Causality test,

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