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

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.