Policymakers and pundits who have pushed budget austerity in the face of a sluggish economic recovery and stubbornly high unemployment found intellectual cover in a … between public debt and economic growth is [6, 7]. The results for Variance Decomposition indicate that, a shock to public debt causes 1.509115 % fluctuation in economic growth in the second quarter. 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 non-standard ways. The model is an extension of the work of Barro (1990) and Glomm and Ravikumar (1997) in that the government can incur debt … All material on this site has been provided by the respective publishers and authors. Growth-oriented reforms can increase the present value of repayment, and the relative impact on growth from alternative government financing can be evalu-ated. The survey finds diverse and, in some cases, inconsistent evidence on the relative impact of public debt on economic growth. Raising taxes … Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. on the economy’s growth, the latter does not affect the economy’s long-run performance, although it may have positive short-run implications. Prepared by Cristina Checherita-Westphal. Recent narratives of excessive borrowing by the Ghanaian government for various projects, shows the country’s appetite for more and more extortionate and unaffordable foreign loans. Article Information A number of other studies have looked at the impact of external debt on economic growth in developing economies. The objective of this paper is to investigate the empirical effect of public debt on economic growth, using a sample of six Central African Economic and Monetary Community countries over the years from 2000 to 2016. (2) Page 13: “Thus, in the highest, above-90-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950-2009 sample declines to only 2.5 percent per year in the 1980-2009 sample” is corrected to read "Thus, in the lowest, 0–30-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950–2009 … the various RePEc services. The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. Most research has shown that the effects of public debt on economic growth differs across countries; depends on country-specific factors and institutions such as the level of fiscal imbalances, the level of debt sustainability, the level of financial deepening, macroeconomic stability, and political environment. From the empirical perspective, the results from the literature on the relationship between public debt and economic growth are far from conclusive either [see Panizza and Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. of public debt on economic growth. In both academia and policy making, the issue of how public debt affects economic growth has remained a concern (Mohanty and Mishra, 2016). The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. This paper explores long run relationship between external debt and economic growth in developing economies. You can help adding them by using this form . It depends to a great extent what has caused the growth in debt. It also allows you to accept potential citations to this item that we are uncertain about. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level… Servicing a debt by export earnings may affect economic growth by depleting available income from social service activities. Investment is a major component and driving factor of growth which is also directly affected by the accumulation of debt. This study examines the nonlinear impacts of four country risk indices on the debt‐growth nexus for 61 countries in a panel data framework. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation. Once the debt-to-GDP is beyond the threshold, the effect changes to negative. Moreover, it reduces the level of private fixed capital formation in the country. Further Evidence from CEMAC Zone . Hence, the aim of this study is to examine whether there exists mutual consensus on the effects of public debt on the economic growth of a country or group of economies. FDI in turn reduces for a … How Does Public Debt Affect Economic Growth? A systematic review on related articles from SCOPUS database was conducted by adopting a standard procedure in the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA), namely identification, screening and eligibility. As mentioned above, this analysis of the relationship between debt and economic growth is based on theoretical framework design after Cunningham (1993) who argues that the effect of debt burden affects on the productivity of capital and labour is similar to that of exports on the productivity of non-export sector in the … Please note that corrections may take a couple of weeks to filter through Thirty-three articles were chosen as the main articles to be reviewed. Keywords: Public debt, Gross domestic product, External debt, External debt service 1. This paper develops a quantitative theory of fiscal policy and economic growth that includes both corruption and tax evasion. Interest rate-growth differential and government debt dynamics. The empirical results show … 3. Downloadable! Infographic: How Does the National Debt Affect the Economy? Reduced Public Investment. Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. This study examines the relationship between public debt on both short and long-run economic growth, in a panel of selected Asian countries for the period of 1980–2012. A large number of literatures are available showing negative relationship between public debts and economic growth. Most studies concluded that debt negatively affects economic growth, some aver that debt positively affects growth whilst others claim that debt has no influence on economic growth but most of these studies focused on the developed economies. If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. The Impact of Government Debt on the Economic Growth of Ghana: A Time Series Analysis from 1990-2015. International Journal of Innovation and Economic Development. This can hit economic growth as well as create turmoil in global financial markets. correlations between debt and growth, and does not take into account other determinants of growth as well as issues such as reverse causality (i.e., low growth can lead to large public debt). Higher long-term interest rates, resulting from more debt-financed Government budget deficits, can crowd Hence, the aim of this study is to examine whether there exists mutual consensus on the effects of public debt on the economic growth of a country or group of economies. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. Model results also show that the real GDP growth rate does not decline sharply whether the public debt-to-GDP ratio is lower than 220%. The empirical results show that public debt has an adverse and statistically significant effect on economic growth. By analysing the relationship between economic growth and public debt for the period 1949 to 2009 for 20 developed economies, [6,7] found that high levels of debt and economic growth are positively correlated. Too much dependence on public debt enlarges macroeconomic risks, obstructs economic growth, and hinders economic development. In the fourth quarter, a shock to public debt account for … Public debt allows governments to raise funds to grow their economy or pay for services. See general information about how to correct material in RePEc. In addition, high levels of debt would affect many other aspects of the economy in the future. The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Politicians prefer to raise public debt rather than raise taxes. Granger causality results have shown that public debt can Granger cause economic growth, and there is bi-direction relationship between the two variables. Hence, in modern times, public debt is used as an important instrument to bring about economic stability in the economy. Examining the correlation between public debt and economic growth, Reinhart and Rogo ff’s (2010) seminal work revealed a negative relationship between debt and economic growth. The Hausman's test suggests that the fixed-effects model is preferable. Further Evidence from CEMAC Zone. This column reviews the evidence on what is true. Although the majority of the surveyed literature supports the negative effect of public debt on economic growth, several other studies have found a long-run positive impact of public debt on economic growth through the fiscal multiplier effect. Effects Of Public Debt On Economic Growth 1875 Words | 8 Pages. Other studies demonstrate that public debt can negatively affect growth (Saint-Paul, 1992, Brauninger, 2005). It was found that there is no mutual consensus on the relationship between public debt and economic growth. 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. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. In cases where countries depend heavily on public debt, economic growth … The … The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. By using a sample of 70 developing countries over a period of 1976-2011, the study finds that increase in external debt stock reduces the fiscal space to service external debt liabilities and thus dampens the economic growth. It was found that there is no mutual consensus on the relationship between public debt and economic growth. Further, the debt overhang theory suggested that if future debt gets larger than the country’s repayment ability, the expected debt-service costs will discourage further domestic and foreign investment, and thus harm economic growth. We employ several econometrics methods: pooled mean group, mean group, dynamic fixed effects and also allow for common correlated effects. In addition, the study seeks to determine whether there is evidence of a nonlinear impact of debt on growth and to identify this critical threshold beyond which debt impairs growth. between public debt and economic growth in advanced economies. Policymakers and pundits often depict fiscal responsibility and economic growth as being at odds with one another. Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. In truth, however, a strong fiscal outlook is an essential foundation for a growing, thriving economy . The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. 2. The very public Rogoff-Reinhart kerfuffle has focused on what is not true. This column presents new evidence challenging this view. The difference between the average interest rate that governments pay on their debt and the nominal growth rate of the economy is a key variable for debt dynamics and sovereign sustainability analysis. between public debt and economic growth. A systematic review, Nur Hayati Abd Rahman & Shafinar Ismail & Abdul Rahim Ridzuan, 2019. However, in this research both fixed and random effects models are used. While the public debt to GDP ratio is both below and above this threshold, the effect of public debt on economic growth is negative and statistically significant. The impact of a change in public debt … The public debt-to-GDP ratio elasticity of the real growth … 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 non-standard ways. Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. But, if the borrowing country failed to service its debt, it will lose its’ credit worthiness; and this in turn might affect the economic performance of the borrowing country by reducing the availability of foreign debt. How Does Public Debt Affect Economic Growth? It was found that there is no mutual consensus on the relationship between public debt and economic growth. The public debt is the amount of money that a government owes to outside debtors. The study investigates the effect of public debt on economic growth in Kenya, between 1980-2013.The choices of period was guided by data availability and escalation of Kenya’s public debt. http://hdl.handle.net/10.1080/23311975.2019.1701339, How does public debt affect economic growth? If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. The public debt-to-GDP ratio elasticity of the real growth … This cross-sectional analysis of developed and developing countries categorizes countries into four groups, by average debt levels, from … government debt External debt can be described as the situation where governments face budget deficit due to the hig… For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). The federal government pays for defense equipment, health care, and building construction, and … Traditional literature regarding economic growth has emphasised the positive role of debt in economic development. Hence, public debt will affect economic growth in a negative manner. This study uses a sample of 39 However, they found a threshold of public debt relative to GDP 2018 Dec,2(5):31-39. "The Impact of Government Debt on the Economic Growth … As the access to this document is restricted, you may want to search for a different version of it. Introduction The relationship can be positive, negative or even non-linear. Conclusion It is hard to make generalisations about the effect of debt on economic growth because so many factors affect growth. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made. Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth. The Hausman's test suggests that the fixed-effects model is preferable. The Reinhart-Rogoff hypothesis argued that public debt can positively affect the economic growth if the debt to GDP level is lesser than 90% (Reinhart, Reinhart, & Rogoff, 2015). Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. public debt and economic growth in Jamaica. Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. Reviewers: (1) Afsin Sahin, Gazi University, Turkey. How Does Public Debt Affect Economic Growth? However, in this research both fixed and random effects models are used. external debt servicing doesn’t affect economic growth. This allows to link your profile to this item. The objective of this paper is to investigate the empirical effect of public debt on economic growth, using a sample of six Central African Economic and Monetary Community countries over the years from 2000 to 2016. In general, external debt may affect economic growth in two ways:- a. You can help correct errors and omissions. Further Evidence from CEMAC Zone Henri Njangang Ndieupa1* 1The Dschang School of Economics, Cameroon. These relationships were found to be significant as well. Further Evidence from CEMAC Zone . Under a high‐risk environment, a country's economic growth is harmed by raising its public debt. Public profiles for Economics researchers, Various rankings of research in Economics & related fields, Curated articles & papers on various economics topics, Upload your paper to be listed on RePEc and IDEAS, RePEc working paper series dedicated to the job market, Pretend you are at the helm of an economics department, Data, research, apps & more from the St. Louis Fed, Initiative for open bibliographies in Economics, Have your institution's/publisher's output listed on RePEc. public debt and economic growth in Jamaica. In this section, a simple overlapping-generations model (OLG) of endogenous economic growth is developed, wherein it is established that public expenditures can affect economic productivity. These economies were least studied in this context. Empirically, the evidence from previous literature demonstrated that the debt-to-GDP threshold for all countries is not necessarily 90%. The results of the analysis indicate that there is a negative impact of total public debt, especially the external debt on economic growth. Government borrowing reduces economic growth by absorbing private savings that would otherwise be used to finance private investment. MLA: Anning, Lucy, Ofori Collins Frimpong, and Affum Ernest Kwame. When requesting a correction, please mention this item's handle: RePEc:taf:oabmxx:v:6:y:2019:i:1:p:1701339. Some studies on Sub-Saharan Africa concluded that external debt is deleterious to growth, but these studies are very scanty. Incorporated as a not-for-profit foundation in 1971, and headquartered in … When public debt reaches 77% of GDP or higher, the debt begins to slow growth. All rights reserved. A systematic … Author’s contribution The sole author designed, analyzed and interpreted and prepared the manuscript. How Does the Debt Crisis Affect Investment and Growth? While there is evidence that public debt is negatively correlated with economic growth, there is no study that makes a strong case for a causal relationship going from debt … It helps sustain growth by reducing the investment-savings gap, brings funds for spending on modern technology and increases productivity. Hence, public debt will affect economic growth in a negative manner. Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. Article Information Editor(s): (1) K. N. Bhatt, Department of Economics, G. B. Pant Social Science Institute, Allahabad Central University, India. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. Even when the other fundamentals of the economy suggest that the optimal public debt level should be zero, the presence of corruption can cause substantial government borrowing. Politicians prefer to raise public debt rather than raise taxes. Reviewers: (1) Afsin … When public debt reaches 77% of GDP or higher, the debt begins to slow growth. How Does Public Debt Affect Economic Growth? They argue that policymakers should be wary – the case for cutting debt to boost growth … Model results also show that the real GDP growth rate does not decline sharply whether the public debt-to-GDP ratio is lower than 220%. inverted U-shaped pattern (low levels of public debt positively affect economic growth, but high levels have a negative impact).4 However, other empirical studies reach very different conclusions. In fact, one of the major objectives of government borrowing today is to strengthen the economy by freeing it from the evils of depres­sions and also to build up the economy and stable economic growth. between public debt and economic growth in advanced economies. The Hausman's test suggests that the fixed-effects model is preferable. These actions have brought into sharp focus the scale of the crisis in Ghana’s financial and economic wellbeing (Nyarko, 2014). The fixed-effects model is preferable stability in the Reinhart-Rogoff hypothesis is also not applied across countries. Future studies should investigate the effects of public debt can granger cause economic in. There is bi-direction relationship between public debt reaches 77 % of GDP or higher, the UK a... Infographic: how does public debt has an adverse and statistically significant effect on economic growth because so factors. 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