Fiscal Policy, Institutional Quality, and Public Debt: Evidence from Transition Countries

Thi Anh Nhu Nguyen,Thi Thuy Huong Luong

doi:10.3390/su131910706

Abstract

This research makes a significant contribution to the literature on the economic implications of fiscal policy and institutional quality by modeling empirically the impact of these factors on public debt in 27 transition countries over the period 2000–2018. Applying Ordinary Least Squares (OLS), Random effects, and two-step GMM methods, the research gives evidence to confirm the background theory that deducing public expenditure and improving government revenue could push government debt lower. The main findings especially demonstrate that institutional quality contributes to making an impact on public debt. Particularly, weak governance in controlling corruption leads to higher accumulation of public debt while financing to improve the institutional quality in relation to government effectiveness, regulatory quality, and rule of law after changes in the regime in those countries increases the size of public debt. The results of this paper convince policymakers of crucial implications of both fiscal policy and institutional quality in managing public debt.

Highlights

Introduction from Transition CountriesPublic debt has expanded greatly across a wide scope of countries
While government revenue in selected transition countries stood at 33.35% GDP, government final consumption expenditure data which represent public expenditure in these countries are about 15.75% GDP
At the beginning of empirical analyses, the ordinary least square (OLS) regression shown in column 1 indicates that there is a negative statistically significant relationship between government revenue (GR) and public debt (PD), while the nexus of public expenditure (PE) and public debt (PD) is positive

Summary

Introduction

Public debt has expanded greatly across a wide scope of countries. Reducing public debt is one of the major issues and its goal is a vital factor in the development of numerous countries in the future [1]. Reinhart and Rogoff [2] found in their pioneering study that there is a negative effect of public debt on economic growth when the debt level surpasses. Subsequent studies have achieved the same outcomes. Due to the 2008 financial crisis, the average of public debt to GDP was about 73% in the European. Monetary Union (EMU), and about 71% in the US. Japan experienced the biggest sum of over 170% of GDP [3]. Inequality among and inside countries has risen and polarization has deepened. Instability of society, politics and economies has grown [4]

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Conclusion