Abstract
The study attempts to examine the effect of fiscal deficit and government debt on interest rates in Sri Lanka over the period of 1977–2018 by using Unrestricted Vector Auto Regression (UVAR) Analysis. The results reveal that there is no significant effect of fiscal deficit and government debt on interest rates. The study suggests that minimizing the intervention in determining interest rates through administrative arrangements and other controls which were exercised in the past and adopting corrective measures to develop a competitive and diversified government securities market, facilitates to identify significant relationship among aforementioned variables as the theory explains. The study can be further developed by eliminating the existing limitations of insufficient time series data to reflect actual behavior of both short term and long-term interest rate structure of the government securities market in Sri Lanka.
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