The link between public debt and investment: an empirical assessment from emerging markets

Abstract

ABSTRACT This paper provides empirical evidence of the relationship between public debt/GDP ratio and investment. Based on panel data analysis considering 24 emerging markets from 1996 to 2018, we investigate the effect of an increase in public debt on investment at three levels: aggregate, private sector, and public sector. Moreover, we consider the possibility of the global financial crisis of 2007–2008 (GFC) has changed the relationship between public debt and investment. We also assess the effect of a public debt/GDP ratio higher than the prudential level of 60% on investment. The findings indicate that an increase in the public debt/GDP ratio has a significant harmful effect on investment. In particular, we observe that after the GFC, the adverse effect of a higher public debt/GDP ratio on investment increased considerably. Moreover, our results show that the highest adverse effect of a rise in the public debt/GDP ratio is on the public sector investment.