Effect of external and domestic Public debt on Private investment (A VAR Model analysis)

Abstract

The objective of this paper is to examine the relationship between private investment and public external and domestic debt for the period of 1980 to 2021. In this study, we checked the unit-root test by using Augmented Dickey-Fuller (ADF) test and Pillips-Perron (PP) test. Moreover, the result of Johansen test states that there is no long-run cointegration between variables. Therefore, this study used VAR-Model for analysis. Furthermore, different type of tests has been applied such as, Shapiro-Wilk W test, Breusch-Pagan/ Cook-Weisberg Test, Breusch-Godfrey LM test, Impulse response analysis and Ramsey Reset test. The estimated result shows a negative and significant relationship between private investment with credits to the private investments by banks and public external debt. However, there is a positive and significant association between private investment with domestic public debt. The Granger Causality Wald test confirms that the most of the previous value of one variable helps to predict the future value of other variables. Hence, it is concluded that the government should revisit their external debt policy to support the country infrastructure, macroeconomic balance and for other public expenditure because this increasing public debt is detrimental to the private investment.