The Impact of Public Debt on Economic Growth in the Republic of Kosovo

Fitim Hoxha ,Shewa Tafa ,Roberta Bajrami

doi:10.7176/jesd/11-18-06

Abstract

The main purpose of this paper is to examine the impact of public debt in relation to economic growth. The current public debt and economic growth surveys show that the threshold where public debt yields positive results in GDP growth for transition countries is 30-50% of GDP and from this level or above, there are negative effects in economic growth. Based on this data, this paper analyzes the current public debt and its effects in the future in the Republic of Kosovo. The methodology used in this paper is through the empirical method. The data were analyzed through the R program and they showed the impact of public debt in economic growth in the Republic of Kosovo. By using the VAR (vector autoregression) model, the impact of public debt was measured, as well as the government expenditure, gross fixed capital formation, and gross saving on economic growth in the Republic of Kosovo for the period of 2008 to 2018. The results suggest that Republic of Kosovo achieved higher growth rates when the public debt-to-GDP ratio was around 10–30 percent Keywords: Public Debt, Economic Growth, VAR model DOI: 10.7176/JESD/11-18-06 Publication date: September 30 th 2020

Highlights

Analyzing different research on public debt and economic growth in different countries in panel and time series data, we see different causal findings
The findings in this paper show the impact between public debt and economic growth in the Republic of Kosovo in the period from 2008 to 2018
The time period of the research is shortly (2008-2018), the results in the model would be more accurate if the time period of the research had monthly data for these years, so the largest number of observations affects in accuracy results

Summary

Introduction

Analyzing different research on public debt and economic growth in different countries in panel and time series data, we see different causal findings (positive and negative correlations between public debt and economic growth). According to the authors in panel data and time series data Reinhart and Rogoff (2010) and Pattillo (2011), Wigger (2009), Greiner (2012), Taylor (2012), Savvides (1992); Kourtellos, Stengos, and Tan (2012) public debt has a positive impact on economic growth in short term and long term. Presbitero (2013), Cochrane (2011), Lof and Malinen (2014), Calderon and Fuentos (2013), in panel data findings that public debt have a negative effect on economy growth. In time series data Atique and Malik (2012), Bader and Magableh (2009), Ahmed (2015), Boboye and Ojo (2012) conclude that public debt and external debt have a negative effect on economy growth. Any eventual increase in the public debt above the threshold set affect negatively on economic growth (Jernej Mencinger Alexander Aristovnik, Miroslav Verbic (2015), Checherita and Rother (2010), Reinhart and Rogoff (2010), Afonso and Alves (2015), Bexheti et al (2020)

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