Abstract
PurposeThis study aims to examine the impact of external debt on economic growth in Bangladesh within a broader macroeconomic scenario.Design/methodology/approachIn the process of doing so, it assesses the empirical cointegration, long-run and short-run dynamics of the concerned variables for the period of 1980–2017 applying the autoregressive distributed lag (ARDL) bounds testing approach to cointegration. First, debt-gross domestic product linkage explores the impact of external debt impact on economic growth using a set of macro and country risk variables, and then this linkage is also analyzed along with a newly formed macroeconomic policy (MEP) variable using principal component analysis.FindingsThe study results reveal the negative impact of external debt on GDP growth, but the larger positive impact of MEP index indicates that this adverse effect of debt can be mitigated or even nullified by sound MEP and appropriate human resource policy.Originality/valueThe dynamic effects of different shocks (external debt and macro policy variable) on economic growth by vector autoregression impulse response function also confirm our ARDL findings.
Highlights
The prime objective of any economic policy of developing country such as Bangladesh is to attain sustainable economic growth with infrastructural development and poverty reduction
The econometric form of the first model relating to external debt and gross domestic product (GDP), once stationarity or cointegration are verified: LGDPt 1⁄4 a þ b 1LEDGt þ b 2LBDGt þ b 3LINFt þ b 4LTOt þ b 5LSERt þ b 6LPt þ « t where all the variables are discussed above, a is the intercept, b 1 À b 6 are the coefficients of explanatory variables and « is the error term
The foremost focus of this study is to analyze the impact of external debt on the economic growth of Bangladesh, within the purview of macroeconomic policy (MEP)
Summary
The prime objective of any economic policy of developing country such as Bangladesh is to attain sustainable economic growth with infrastructural development and poverty reduction. External borrowing would be enhancing capacity and output growth making the debt productive and justifiable (Poirson et al (2002) and Pattillo et al (2004)). On the contrary, this debt can create fiscal imbalances and excessive foreign borrowing that may make the country more vulnerable to different shocks and crises. This debt can create fiscal imbalances and excessive foreign borrowing that may make the country more vulnerable to different shocks and crises It reduces the effectiveness of fiscal policies and limits the ability of the monetary authority to raise
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