Impact of External Debt on Economic Growth in Brazil: An ARDL Bound Testing Approach

Abstract

For developing countries, sustainable economic growth is one of the key macroeconomic objective. However not every country has enough capital to support GDP growth. Even that the country hasn’t enough national capital, the government can borrow some capital as external debt to support GDP growth. The aim of this study is to investigate the relationship between economic growth and external debt fort he Brazilian economy. In this study, the effect of various variables such as the ratio of external debt to GDP, ratio of debt service stock to GDP, the ratio of national expenditure to GDP, real Exchange rate, trade openness were investigated in the long run and short run. Accordingly, the effect of external debt on economic growth was determined with the help of ARDL Bound Test. The data used in the study covers the period of 1970-2015. Acording to the findings, a long- term relationship was found between external debt and growth rate in Brazil. It was concluded that external debt had a negative effect on the economic growth. According to this result, it is thought that developing countries external borrowing, providing sustainable debt and converting debt into investments will increase the GDP.