Public debt is crucial for economic growth and development especially for countries with a lack of savings and investments. This study examines the effect of both public external and domestic debt on economic growth in swaziland including variables such as. In order to make this point, the paper proceeds as follows. The relationship between debt servicing and economic growth. That is, contrary to rr, average gdp growth at public debt gdp ratios over 90 percent is not dramatically di erent than when debt gdp ratios are lower. The controversial findings by reinhart and rogoff have continuously generated debates on the threshold of debt towards gdp. Impact of public debt on economic growth in advanced economies. The government announced a series of relief measures worth around 2. In his seminal paper, diamond 1965 deals with the effect of public debt in a lifecycle olg model. Links between economic performance and external debt can be observed through the effect that a fiscal deficit can have on investments. We correspondingly refute the claim by rr that there exists a historical boundary that is robust across countries and time periods in which economic growth consistently falls off in a nonlinear pattern when the public debt levels exceed 90% of gdp. Therefore, this paper is aimed to address the gap whether there is a specific threshold for the public debt which can be applied to all economies. If low growth causes high debt it is less likely that one would observe a distinct threshold in the debt and growth relationship. The paper examined the causal nexus between public debt and economic growth in nigeria between 1970 and 2010 using a vector autoregressive var.
The paper employs an autoregressive distributedlag model, which jointly captures both shortrun and longrun effects. While the economic growth rate is likely to have a linear negative impact on the public debttogdp ratio, high levels of public debt are also likely to be deleterious. The variables used in the study were tested for stationarity using the augmented dickey fuller and philip perron test. Evidence from advanced countries figure 2 presents a summary of inflation and gdp growth across varying levels of debt for 20 advanced countries over the period 19462009. Public debt and propoor economic growth evidence from. Public debt and economic growth in advanced economies 179 swiss journal of economics and statistics, 20, vol. As old as the origin of the state, public debt is understood as a set of state obligations to third parties and. By diverting societys limited capital from productive private to unproductive public sector public debt acts as a growthretarding factor. Quantitative analysis is not available in bangladesh about how external public debt affects growth though it is always discussed in a descriptive view. The choices of period was guided by data availability and escalation of kenyas public debt. A number of other studies have looked at the impact of external debt on economic growth in developing economies. Pdf the impact of public debt on economic growth in the israeli.
Public debt can be split into internal money borrowed within the country and external funds borrowed from. London, in the workshop on public debt and economic growth of the european commission, economic and financial affairs, brussels, in the diw annual workshop on macroeconometricmodelling, berlin, at the uece conference. It becomes a tax on domestic production such that the amount spent. In section 3, describe the data, the setup and the methodology. Jul 26, 2010 rrowing on growth stress the importance of deficits, not debt, a number of economic observers have made the claim that rising debt levels can affect economic performance in nonstandard ways. The constant need for governments to borrow in order to finance budget deficit has led to the creation of external debt osinubi and olaleru, 2006. Intergenerational policies, public debt, and economic growth.
Cecchetti, mohanty and zampolli the real effects of debt 4 1. This paper examines the impact of public debt on the economic growth in advanced economies over a period of 1946 to 2009, using an econometric approach. Chapter 3 public debt, economic freedom, and growth ambassador terry miller and j. For individual households and firms, overborrowing leads to bankruptcy and financial ruin. The study employs the ardl model to examine the longrun and shortrun effects of public debt on economic growth for south african. An evaluation of relationship between public debt and. Pdf the impact of growing public debt on economic growth. This paper examines the effect of public debt in pakistan since the 1980s to 2014. In this paper, we propose a new instrument for public debt and show that instrumental variable regressions do not provide evidence that public debt.
Public debt, sustainability and economic growth theory. Kumar and jaejoon woo july 2010 this paper explores the impact of high public debt on longrun economic growth. While the data on debt do not figure in the numerical economic freedom scores or rankings, they do. The relationship between public debt and economic growth has been discussed in recent years. Public debt and economic growth public debt arises as a result of budget deficit and the failure of tax revenues to cover projected expenses, and is an instrument used to cover those budget deficits. The link between public debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt reinhart et al. It is the point of interest of this paper to work with external public debt and economic growth. Thus an economy grows much faster without public debt than with debt. In this paper we analyze an endogenous growth model with public capital and public debt where we posit that the primary surplus of the government is a positive function of cumulated past debt with. If a greater portion of foreign capital is used to service external debt, very little will be available for investment and growth.
And this can be explained through the debt overhang and crowding out effects. The relationship between economic growth and public debt is a very controversial issue by economists. The three economic fundamentals studied include the economic growth, investment and unemployment and the effect of public debt, across the three decades, has been examined on each of the fundamental. Some studies find no evidence of causal effects of public debt on economic growth e. An empirical analysis of east african countries halima ibrahim x506723420 a research paper submitted in partial fulfilment of the requirements for the award of a degree of master of arts economics, university of nairobi. Thus, if such a threshold exists, it is much more likely to be driven by a causal effect of debt on growth. The focus in this book is on fiscal policy issues, but it also deals with monetary policy aspects. As a result, the pace of economic growth slows and future living standards will decline. Based on the diamond model, auerbach and kotlikoff 1987 reveal significant crowding out of private investments by public debt. Pdf this study examined the impact of public debt on economic development of nigeria using annual time series data spanning 1986 to 2014.
The issue of whether public debt is useful or harmful towards economic growth is one of the most prevailing debates in the literature with no consensus existing on the subject matter. Economic growth, external debt and budget deficit in jordan. Finally, the existence of a threshold bears on the question of causality. In endogenous growth models public debt has generally a negative effect on longrun growth barro, 1990, saintpaul, 1992. The other channel through which debt obligations affect economic growth is known as crowding out effect. However, many studies show negative effects of public debt on economic growth. The study investigates the effect of public debt on economic growth in kenya, between 198020. Economic growth, external debt and budget deficit in. Public debt receipts and public debt disbursals are borrowings and repayments during the year, respectively, by the government. Our finding that there is no evidence that public debt has a causal effect on economic growth is important in the light of the fact that the negative correlation between debt and growth is sometimes used to justify policies that assume that debt has a negative causal effect on economic growth.
That is, contrary to rr, average gdp growth at public debtgdp ratios over 90 percent is not dramatically di erent than when debtgdp ratios are lower. Public debt and growth international monetary fund. According to elmendorf and mankiw 1999 state debt is important for effects that it brings itself, directly or indirectly, in the countrys economy. The difference between receipts and disbursals is the net accretion to the public debt. The main problem is that, kenya government has been relying heavily on public debt, aid and grants as a source of finance. Impact of public debt on the economic growth of pakistan. The results of the models indicate that the public debt has a nonlinear impact on economic growth. We investigate the relationship between public debt and growth for a panel sample of 128 countries including 26 advanced, 40 emerging and 62 developing economies for a period of 19602011. Results of the study show that economic growth is not very much affected by external debt servicing. Used wisely and in moderation, it clearly improves welfare. The effect of government debt and other determinants on.
Public debt and economic growth economic systems matter pfh. Keywords public debt, economic growth, developing countries. Public debt and economic growth in ghana 121 population growth rate have a positive impact on the real gdp growth rate and are statistically signi. The theoretical analysis is complemented with empirical time series analyses on debt sustainability and with panel studies dealing with the relationship between public debt and economic growth. Debtservicing cost of public debt can crowd out public investment expenditure, by. The current study examines the consequences of public debt for economic growth and poverty regarding selected south asian countries, i. This paper analyses the relationship between debt servicing and economic growth in kenya for the period 1970 2008, focusing on both internal and external debt service. Public debt and economic growth economic systems matter. The impact of public debt on economic growth of pakistan. Pdf the impact of public debt on economic development of. It is also hard to find fullfledged theoretical models that predict nonmonotonicity or threshold effects in the relationship between public debt and economic growth.
Empirically, measuring debt as a ratio to gdp automatically creates a negative correlation between debt and growth and this negative correlation can be amplified by the presence. T he index of economic freedom includes this year, for the first time, data on public debt in the economies under consideration. Chapter 3 public debt, economic freedom, and growth. Economic consequences of high public debt and lessons. There, public debt apparently exerts neutral or even positive growth effects, while for nordic countries a nonlinear relationship is discovered, with negative debt. Nantwi christopher erickson, department of economics, applied statistics and international business, new mexico state university, box 30001, msc 3cq, las cruces, nm 88003. External debt is a major source of public receipts and financing capital accumulation in. Pdf external debts can have either positive or negative effects on the economic growth of countrys economy. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into. The advantage of a monograph, compared to publications in the form of research papers, is that a book. While the economic growth rate is likely to have a linear negative impact on the public debttogdp ratio, high levels of public debt are also likely to be deleterious for growth, but potentially after a certain threshold has been reached. These relationships were found to be significant as well. In section 4, give estimation results and test results. Impact of public debt on economic growth in advanced.
Rising public debt to gdp can harm economic growth by alexander chudik, kamiar mohaddes, m. Public debt, inflation, and economic growth in african. Public debt, economic growth, bounds testing, euro area, peripheral euro area. In standard overlapping generation models of growth public debt reduces savings and capital accumulation via higher interest rates, thus weakening economic growth modigliani, 1961, diamond, 1965, blanchard, 1985. In section 5, provide result from robustness checks, including check for in uential countries and an analysis on impact of debt on longterm interest rates. External public debt and economic growth in morocco. We use annual data from both central and peripheral. Afxentiou and serletis 1996 found that no causality exists between debt and income. However, external debt may have negative impact on investment through debt overhang and creditrationing problem eduardo, 1989. However, the relationship between debt and the ability of conduct countercyclical policies is more likely to depend on the composition of public debt than on the level of public debt hausmann and panizza, 2011. Public debt and economic growth in advanced economies. Government debt and economic growth economic policy institute. The current study aims to investigate the impact of economic growth and external debt on budget deficit in jordan for the period 19932017, the study used unit root test, autoregressive distributive lag ardl approach, bound test, to examine the study hypotheses.
The objective of this study was to establish the relationship between public debt and economic growth in afghanistan. In the short run, there is bidirectional causality between external debt and economic growth. Instead, it was found that labour force has a strong relationship with. Debt overhang phenomenon is where substantial resources are used for debt servicing such that it stifles economic growth.
Evidence from advanced countries figure 2 presents a summary of inflation and gdp growth across varying levels of debt for. This chapter will cover both theoretical papers on the relationship between public debt and economic growth as well as the rapidly expanding empirical literature on the subject. Introduction greece experienced a severe debt crisis in 2010 from which it has still not fully recovered. New evidence on debt as an obstacle to us economic growth. The relationship between debt servicing and economic. We also show how the relationship between public debt and gdp growth varies.
It develops an empirical model that incorporates the role. But, when it is used imprudently and in excess, the result can be disaster. In the presence of wage rigidities and unemployment, instead. The impact of high and growing government debt on economic. Karagol 2002 however, found a unidirectional causality from debt to economic growth. For example, orszag, rubin, and sinai 2004 and ball and mankiw 1995 raise the specter that that rising debt levels could make investors wary that a. This paper empirically investigates the short and long run impact of public debt on economic growth. Public debt and economic growth in ghana victor owusu. Government debt and economic growth economic policy.
Augmented dickeyfuller test has been used to diagnose whether time series data are nonstationary. In section 2, we present our arguments about fiscal uncertainty driving growth effects of public debt in clusters of countries sharing similar. A prudent public debt management helps economic growth and stability through mobilizing resources with low borrowing cost and limiting financial risk exposure. Does high public debt consistently stifle economic growth.
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