Abstract
The aim of this paper is to examine the impact of public debt on economic growth in Tunisia over a period spanning around two decades (1990-2013). Using the Autoregressive distributed lag model (ARDL), the paper traces a long run equilibrium between public debt and economic growth. Besides, we used the Granger causality test to examine the direction of causality among various variables. The results show that public debt and total debt service have a negative and significant effect on economic growth in the long run. In the short and long run there is a unidirectional Granger causality between public debt and economic growth. We also find that there is a bidirectional Granger causality between total debt service and economic growth in the long run. While, there is no evidence of short run causality.
Highlights
In recent years, public debt has received considerable attention from governments, policymakers and scholars as well as international organizations (World Bank, International Monetary Fund...) due to its critical implications for a country’s development
Delong and Summers [5] suggest that expansionary fiscal policy that lead to high public debt and avoid economic protracted recessions, raise short and long term growth
In the majority of studies focused on developed countries facing the problem of an elevated and unsustainable level of public debt, we found that the empirical evidence on the transmission channels through which high debt is likely to have undesirable outcomes on economic growth is relatively limited
Summary
Public debt has received considerable attention from governments, policymakers and scholars as well as international organizations (World Bank, International Monetary Fund...) due to its critical implications for a country’s development. The Tunisian government tries to reduce the fiscal deficit by increasing external and internal public debt, which is likely to affect the economic growth of the country. The main question of our study is do high levels of public debt reduce the short and long-run economic growth in Tunisia?. The economic literature indicated that public debt could have a negative effect on long-run economic growth through many channels. It may reduce the productivity of public expenditures [1], create anticipations of future financial repression and increase uncertainty [2], increase severing risk [3] and crowd out the private investment through increasing levels of interest rates [4]. Delong and Summers [5] suggest that expansionary fiscal policy that lead to high public debt and avoid economic protracted recessions, raise short and long term growth
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