A Granger Causality Test on the Impact of Public Debt on the Economic Growth of Sierra Leone

Abstract

This study uses the grader causality, Johansen co-integration, and error correction model tests to establish the relationship between public debt on the economy of Sierra Leone from 1986-2015. The economic implications of using government debt as a drive to fund expansionary fiscal policy and inform policymakers to consider the economic viability of government-funded projects and the social cost of pursuing them. To achieve the core objective, this study analyses the impact of public debt on the Sierra Leone economy using the Vector Autoregression (VAR) model approach to investigate the impact of public debt on the key macroeconomic variables of real GDP, Domestic Debt (DDB) and External Debt (EXT). The study established that economic growth proxied by RGDP responds differently to the various components of public debt, which were external and domestic debts. Specifically, the external debt had an insignificant negative effect on economic growth in Sierra Leone. Domestic debt, on the other hand, had a significant positive effect on economic growth. The overall results of the study revealed that there exists a long-run relationship between total public debt and RGDP in Sierra Leone.