International Journal of Management and Business Studies

International Journal of Management and Business Studies ISSN 2167-0439 Vol. 14 (2), pp. 001-024, February, 2025. Available online at www.internationalscholarsjournals.org © International Scholars Journals

Full Length Research Paper

Exploring the Relationship Between Fiscal Deficit and Nominal Interest Rates in Cameroon: Insights from the Loanable Funds Framework

Armand Gilbert Noula

Senior Lecturer of the Department of Economics Analysis and Policy, Faculty of Economics and Management, University of Dschang - Cameroon. Email: [email protected]

Accepted 6 February 2025

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.

Keys words: Budget Deficits; - Interest Rate; - Loanable Funds Models; - Causality test; Cameroon. JEL: Classification: E43; E62