ABSTRACT
This chapter addresses the relationship between deficit financing, crowding out and economic growth in Bangladesh. Annual data from 1974 through 2013 are utilized. The variables in levels are non-stationary. However, all the variables have the same order of integration or depiction of I(d) behaviour for cointegration and as a result, the Johansen and Juselius procedure is applied for cointegration. This procedure indicates that variables are not co-integrated meaning Government borrowing from banks does not have long run theoretical relationships with private investment in Bangladesh. Thus, the estimate of the Vector Autoregressive Model (VAR) is followed and it unveils short-term positive relationship between private investment and Government borrowing indicating existence of short term crowding in effect in Bangladesh. Additionally, it is found that Government can borrow from the banking sector up to 3 % of GDP without any hesitation.
