Abstract
This paper explores the causal relationships between public debt and economic growth, and between public debt service and economic growth in Zambia for the period from 1970 to 2017. Unlike previous...
Highlights
The economic recession and debt crises experienced in many developed and emerging countries, beginning in 2007, led to the renewed academic and policy debate on the causal relationship between public debt and economic growth, and between public debt service and economic growth
As the drive by most countries in sub-Saharan Africa to turn their economies into the uppermiddle-income category by 2030 intensifies, it is imperative that governments understand the factors that influence economic growth, and the direction of causality between public debt and economic growth, on the one hand, and between public debt service and economic growth, on the other hand
The short-run causality is confirmed by the corresponding F-statistic of economic growth (Δyt) in the public debt (ΔPDt) function, while the long-run causality is confirmed by the error-correction term (ECMt-1), in the same function, which is both negative and statistically significant at 1% level
Summary
The economic recession and debt crises experienced in many developed and emerging countries, beginning in 2007, led to the renewed academic and policy debate on the causal relationship between public debt and economic growth, and between public debt service and economic growth (see, among others, Donayre & Taivan, 2017; Gómez-Puig & Sosvilla-Rivero, 2018). The Keynesian school subscribes to a mono-causal theory of growth, which stipulates that debtfinanced public sector spending has a fiscal multiplier on national output (Elmendorf & Mankiw, 1999) This Keynesian view is supported fundamentally by the “law of increasing state activity” hypothesis, which purports that increased government spending boosts the domestic economic activity and crowds in private investment (Ncanywa & Masoga, 2018; Wagner, 1911). There are studies that support the hypothesis that high public debt causes economic growth stagnation This view suggests that the slowdown in economic growth is largely caused by rising public debt which crowds out private investment through high cost of capital (see Mankiw, 2000; Modigliani, 1961).
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