Debt-growth Relationship Research Articles

Government debt and economic growth: heterogeneity, asymmetries, and the role of net debt

ABSTRACT Using data on 167 countries over 1970–2019, this study gathers new evidence about the government debt-growth relationship. We jointly address several features of the panel – foremost asymmetry, cointegration, endogeneity, country heterogeneity and cross-sectional dependence. We find that increases in per-worker debt are detrimental to the long-run dynamics of output, but our nonlinear estimates suggest that changes in government debt propagate their effects through different channels. Applying alternatively gross and net public debt as a measure of indebtedness yields different results too, as happens with the adoption of different estimators. The magnitude of the effects depends on the model specification, indicating that cross-country estimates of the debt-growth nexus require parsimonious interpretations.

The Impact of External Debt on Human Capital Development and GDP Growth in HIPCs: a Comprehensive Approach

The growth theorists argue that human capital development/accumulation (HCD/A) is vital for economic growth. However, the level of external debt accumulation determines HCA and its effect on economic growth. Besides, the impact of external debt on growth is still debatable. Further, the external debt-growth relationship could be non-linear instead of linear, and external debt can affect growth through the HCD channel. Therefore, this study aims to look at the impact of foreign debt on HCD and growth in heavily indebted poor countries (HIPCs) employing seemingly unrelated regressions (SUR) and other alternative simultaneous equations models (SEMs) from 1990–2017. The result indicates the link between foreign debt and HCD is negative and non-linear, but only non-linearity is observed between foreign debt and growth. Besides, external debt affects HIPCs growth through the HCD channel. Therefore, the study recommends essentializing solid macroeconomic policies, strengthening institutional performance, appropriate debt management strategies, and investing borrowed funds in productive projects.

Role of institutional quality in debt-growth relationship in Pakistan: An econometric inquiry

This study attempts to investigate the mediating role of institutional quality on the relationship between public debt and economic growth in Pakistan spanning 1996–2020. Time series data on all six World Bank World Governance indicators of institutional quality is used in the empirical analysis. Findings of the autoregressive distributed lag (ARDL) bounds testing technique and error correction method (ECM) confirmed the existence of cointegration among variables of interest. The short-run results indicate that public debt has a favorable association with economic growth, while the relationship is found to be detrimental in the long run. Furthermore, the combined effect of public debt and institutional quality indicators revealed the significant positive association with economic growth, suggesting that better institutional quality can contribute to mitigate the negative impact of public debt on economic growth in Pakistan.

Institutions Determine Debt–Growth Relationship: Evidence from Fourth Wave of Debt in EMDEs

ABSTRACT The last decade witnessed global debt levels to reach record high. In Emerging Market and Developing Economies (EMDEs) like never before, the (public and private) debt–GDP ratio has been dismally high. An upward spree of the debt–GDP ratio coupled with a looming economic crisis led to concerns about institutional qualities (IQ). We explore how different dimensions of IQ (namely, political, legal and governance) impact the debt–growth relationship in the EMDEs amidst the current fourth wave of debt (2010–2019). We examine whether the relation is monotonic or it varies around a particular threshold value of IQ. By applying a dynamic panel threshold regression model, we obtain two regime-dependent marginal effects of regressors (upper and lower regimes) that are distinguished by a threshold value of IQ. Our results reveal that for each of our considered IQ, there exists a statistically significant threshold value. For public debt, across all dimensions of IQ debt hurts growth in the lower regime, while in the upper regime the association is favourable. While private debt is growth enhancing in the lower regime of all IQs (excepting corruption), while it is inimical in the upper regime.

Reassessing the public debt threshold in the EU: Do macroeconomic conditions matter?

This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members? growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals.

Impact of External Debt and Financial Integrity Management on Economic Growth in Developing Countries: Evidence from the MMQR Approach

The study examined the impact of external debt on economic growth in the context of developing countries. Since the level of financial integrity plays a vital role in the growth factor, we also investigated the direct impact of financial integrity (FI) management on economic growth as well as the moderating role of FI on the nexus between external debt and economic growth. To achieve the goals, we deployed a newly developed econometric approach, the Method of Moment Quantile Regression (MMQR), considering the quantile in both scale and location due to highly heterogeneous panel data from 1990 to 2020. The empirical estimation of the MMQR approach demonstrated that external debt is counterproductive in all quantiles for economic growth in the context of developing countries. Besides, FI management was insignificant in the bottom to top quantiles. Besides, the results also depicted that external debt works better for economic growth by the presence of FI in upper quantiles than the lower quantiles. The findings indicated that external debt is detrimental to economic growth in developing countries, while financial integrity management supports the debt-growth relationship. The study provides several policy implications. Keywords: external debt, economic growth, MMQR, financial integrity, developing countries

The Effects of Regulatory Performance on the Debt–Growth Relationship: Cases of Upper-Middle-Income Economies

Upper-middle-income economies (UMIE) are experiencing an economic slowdown, partly due to weak regulatory performance. This issue leads to slow growth in private sector participation, thus limiting the ability to achieve higher economic growth. At this critical point, the government’s role is to inject funds into economies, hoping that growth can be increased and sustained for an extended period. Nevertheless, injecting more funds through borrowings from external debt exposes economies to vulnerable conditions. Thus, this study aimed to examine how regulatory performance affects economic growth and moderates the debt–growth relationship in UMIE. By using the generalized method of moments (GMM) as an estimation method for 32 countries from 2004 to 2020, regulatory performance was found to adversely affect economic growth. Moreover, as regulatory performance improves, public debt is expected to enhance the economic growth of UMIE. These findings are novel, as they provide significant evidence for the importance of improving the regulatory performance of UMIE. Weak regulatory performance might force a government to become the engine of growth instead of the private sector, thus leading to the adverse effect of debt on growth in UMIE. These findings have to several policy implications, particularly regarding reducing bureaucracy and improving regulatory performance in UMIE. Future researchers could extend this study by comparing the results from different groups of economies or countries.

Government Debt-Economic Growth Nexus in ASEAN-4 Countries

Given a background of controversial political and theoretical academic debate and diverse empirical result, as Checherita and Rother (2010) concluded government debt and economic growth relationship is a country specific issue. This paper aims to investigate the causal and dynamic effect of government debt on output growth in the context of developing economies with generally medium debt regime in ASEAN-4 countries. Namely, Indonesia, Malaysia, the Philippines and Thailand during 1985 to 2019 years. A robust multi-variable vector autoregressive (VAR) model at level is employed to capture the long run relations, and causality is addressed using Toda-Yamamoto (1995) approach. As a by-product of the analysis the effect of government debt on two essential factors of sustainable GDP growth, namely, private capital formation and human capital is examined. The findings of this paper which contrast with the general negative effect found in some empirical studies for developing countries, shows debt does not cause output growth in Indonesia, Malaysia and Thailand but the reverse is true. GDP response to debt shock is negative, positive and positive, respectively yet statistically insignificant. In other hand, in the Philippines the result shows the economy is debt-driven as debt positively cause GDP without improving private investment or human capital. Overall, the findings support well debt management. Given current debt regime, improvements on tax collection and government fund allocation in terms of priorities and efficiencies must be continued.

Role of Uncertainty in Debt-Growth Nexus

This paper analyses uncertainty as one of the factors that affect the public debt-growth nexus. We put forward a hypothesis that uncertainty mediates the effect of public debt on economic growth. The empirical examination of the mediating effect is based on the neoclassical growth equation and consistent with specifications previously used to analyse the sources of heterogeneity in the debt-growth relationship. Since one part of the uncertainty is financial risk, which is closely related to the financial sector stability, we use interest rate spread as a main variable, and the risk premium on lending as an alternative one to proxy financial risk and thus, to some extent, uncertainty. Our results show that lower uncertainty is related to a bigger positive effect of debt on growth and a higher turning point in the debt-growth nexus. On the contrary, higher uncertainty leads to a lower positive and more considerable negative effect of debt on growth in both linear and quadratic specifications.

Role of debt in emerging economies: a re-examination of the debt-growth nexus

ABSTRACT Traditionally, a higher debt burden is expected to negatively affect the economic growth, although the empirical evidence is inconclusive. In this paper we have re-examined the debt-growth relationship for 32 emerging economies while considering possible nonlinear impact of debt on economic growth using a dynamic panel. Our results suggest that for emerging economics, a large debt if used efficiently, can lead to significant positive economic growth. This relationship remains unchanged even when we control for other macroeconomic variables. We have also identified three different threshold debt-GDP ratios for the one, two and three period lags of debt and found an asymmetric impact of debt between above-threshold and below-threshold countries.

Empirical Evidence on Factors Conditioning the Turning Point of the Public Debt–Growth Relationship

This paper contributes to the limited literature on the factors conditioning the turning point of the public debt–growth relationship. A decade after the global financial crisis, when the debt ratio in many countries was still above pre-crisis levels, the COVID-19 pandemic again increased the pressure on public finances. It revived the debate on the ability to promote economic recovery through debt-financed government expenditure. However, more intense government borrowing increases its costs and uncertainty about future taxation policy, thus potentially disturbing private consumption, investment, and economic growth. In this paper, we estimate the thresholds of indicators on which the expenditure multiplier depends, which may already imply a risk that public debt will dampen economic growth. We use a methodology of structural threshold regression to examine the varying effects that debt might have on growth using consumption, investment, taxes, and imports as threshold variables, as well as several other factors suggested by previous contributions. The applied methodology allows for the addressing of parameter heterogeneity and endogeneity to be accounted for at the same time. The main results suggest that a positive debt effect is more likely if the conditions for a high expenditure multiplier are met, that an increase in the public-debt-to-GDP ratio is not necessarily deleterious to growth if shares of private consumption and investment in GDP are high, while the tax-revenue-to-GDP ratio is low.

Does high external debt predict lower economic growth? Role of sovereign spreads and institutional quality

There has been a lengthy debate regarding the relationship between external borrowing and macroeconomic fragility. This paper investigates the predictive power of external debt as an indicator for economic growth to examine the argument that there is a dynamic relationship between external debt and growth. We conduct a panel regression using data from low- and middle-income countries (LMCs) between 1970 and 2018. The results indicate that an increase in total, long-term, or external public debt consistently predicts slowdowns in short- and medium-run growth. Limited evidence on non-linear external debt-growth relationship highlights the fact that external borrowing, especially by the public sector, significantly contributes to macroeconomic fragility. Proxy vector autoregressive (PVAR) estimation also confirms the dynamic causal effect of external sovereign debt expansion on economic slowdowns. Further evidence suggests that even the countries have high borrowing costs, better institutional quality can help mitigate the negative impact of external borrowing on growth.

Role of Governance in Debt-Growth Relationship: Evidence from Panel Data Estimations

This paper provides an empirical analysis of the relationship between debt and national output mediated by a measure of the quality of state governance. Using WGIs dataset of 106 countries for the period 1996–2015, the paper analyzes the mediated effect of governance on debt-growth relationship. For this purpose, we use the fixed effect (LSDV) and system GMM estimation technique in order to overcome the possible problem of endogeneity. Results show the non-linear pattern between public debt and economic growth via governance. Although, public debt has negative impact on economic growth, but the results are statistically positive and significant when public debt is interacted with governance, which confirms that governance is a channel by which public debt influences economic growth. Moreover, we calculate the threshold of governance which shows that the public debt has positive impact on economic growth when the governance level is higher than the threshold and adversely affects the economic growth in the case of low level of governance than threshold. Evidence from this study reveals the fact that governance plays a mediating role in debt-growth relationship as there is a pattern of complementarity between public debt and governance: the higher the level of governance, the lesser the adverse effect of public debt on economic growth.

The Heterogeneous Public Debt–Growth Relationship: The Role of the Expenditure Multiplier

Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

External Debt Dynamics and Sustainable Growth in Nigeria

The paper provides empirical insights about how the interactions between the external debt and external sector dynamics impacts on economic growth in Nigeria. The paper underscored the critical desire to understand how debt-growth relationship could be optimized for sustainable economic development and growth in developing countries. It proposes modelling the external sector and debt dynamics in order to attain sustainable development in Nigeria. This study became imperative because Nigeria occupies a very significant position in Africa. Nigeria, though a developing country, is currently the largest black nation in the world and most populous country in Africa. The paper opted for an ex post facto research design using CBN statistics extrapolated from its statistical bulletin with 37year coverage from1980-2016. The data was analyzed using the ARDL and granger causality technique coupled with other pre-estimation and diagnostic tests. The result showed foreign-debt and debt-service was negatively not-significant on sustainable growth. It was concluded that though Nigeria wasn’t wrongly positioned on the debt-laffer-curve, the economy had not benefitted positively from the mass of debt funds accessed. The paper's primary contribution is finding that external debt and debts service had a negative (not-significant) impact on economic growth in Nigeria. The policy implication of this research may be applied to other developing countries. The propositions may however lack general applicability in more advanced economies.

On the public debt and growth threshold: one size does not necessarily fit all

ABSTRACT In a time of high debt and sluggish economic growth, the Reinhart and Rogoff (2010) conjecture of a common 90% debt threshold for advanced economies triggered a controversial debate among economists and policy-makers. We analyse the relationship between public debt and economic growth for a sample of 20 advanced economies over the period of 1880–2010, using a regression kink model with an unknown threshold proposed by Hansen (2017). We show that the relationship between public debt and economic growth is time-varying and state-dependent. Particularly, the public debt and economic growth relationship is instable for each country in the sample across the whole period of 1880–2010, and the postwar period of 1950–2010, and subject to data and country heterogeneities. These findings reject the existence of any common threshold fitting all countries and call for more theory-based models that take into account fundamentals that vary between countries and impact debt–growth interactions.

Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal

One of the common agenda of underdeveloped economies is to achieve a high and sustainable level of economic growth in the long run. Domestic and external borrowings are playing a crucial role in fulfilling the resource gap in the context of Nepal for a long period. A growing number of recent studies support the idea of a debt threshold level (turning point) above which debt starts reducing economic growth. This paper empirically investigates the relationship between economic growth and several other factors (investment, trade openness, population growth, domestic savings, and government debt) in the context of Nepal. The debt-growth relationship has been estimated by regression analysis and further explored the non-linear relationship between public debt and economic growth using time series annual data for the period of 1976-2019. The ARDL bound technique has been applied to estimate the short-run and the long run impact of debt on economic growth. Moreover, a quadratic bivariate model based on ARDL coefficients has been estimated to identify the growth maximizing level of debt. The estimated parameters confirm the optimum public debt to GDP ratio in the context of Nepal is 33 per cent. The policy implication of this finding for the Government of Nepal (GoN) is to ensure public debt management in line with the growth maximizing debt threshold. Further, a high level of trade deficits and government effectiveness in public sector management squeezes the fiscal space in utilizing adequate public debt in Nepal.

The Nexus among External Debt and Economic Growth: Evidence from South Asia

Over the past few years, external debt positions of South Asian economies have increased to alarming levels, indicating that those countries are more likely to be exposed to a debt crisis. Given the low domestic savings rate of these economies, they are increasingly compelled to invest significant resources in public infrastructure in order to maintain sustainable growth momentum. At the same time, those countries are invited to enrich by integrating with global synergies in the fields of maritime, trade, and financial initiatives. However, as the recent controversy over the debt-growth association is inconclusive to date; preserving the external debt exposures at an optimal level is incumbent. Consequently, this study reviews annual observations of independent cross-sections of South Asia during the period 1981-2017 in order to find the external debt-growth relationship. In addition, the quantitative research strategy used to measure the expected outcomes primarily consists of panel ARDL specifications. On aggregate levels of data, the results suggest that there is a statistically significant negative association between external debt and economic growth. Also, it has been observed that a significant nonlinear relationship exists for lower-middle-income countries.

The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018

At reasonable levels, public debt enhances growth and promotes welfare. However, at high levels it turns out to be detrimental. When does the effect of public debt change from good to bad? To address this question locally, this study investigates empirically the long-run relationship between public debt and economic growth in Jordan, using time series data over the period 1980 - 2018. The modeling of the debt–growth relationship is based on theoretical arguments and empirical considerations and analyzed by adopting both linear and non-linear specifications. The model is estimated by fully modified ordinary least squares (FM-OLS) approach, the empirical results confirm that public debt is negatively associated with economic growth in the long-run. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. There is an evidence of non-linearity between public debt and economic growth in the long-run, with only high levels of debt exceeding 78 percent of GDP, having a significant negative effect on growth. This result demonstrates an inverted U-shaped curve in the debt-growth relationship in Jordan, in other words, the direction of the effect of public debt on economic growth transforms smoothly from positive to negative depending on the level of indebtedness. Accordingly this study emphasizes the need to take actions not only to alleviate public debt but also to place it on a descending pathway in the long-term. As analyzing the relationship between public debt to GDP ratio and economic growth has demonstrated to be necessary for governments to shape suitable fiscal policy guiding principles. It is recommended that the government is permitted to accumulate debt to no more than 78% of GDP; otherwise it will exert a negative effect on the economy.

Debt and Growth: A Decade of Studies

In this policy brief, we review the literature on the debt-growth relationship since the publication of “Growth in a Time of Debt” to evaluate the claim that high government-debt-to-GDP ratios have negative or significant (or both) effects on the growth rate of an economy. In addition, we assess the claim that there is a nonlinear threshold, around 90 percent of GDP, above which debt has a significant deleterious impact on growth rates. With several European countries taking action to successfully reduce their debt-to-GDP ratios in recent years, it is important for Americans to broaden their understanding of the potential negative effects of debt on growth potential, particularly in light of America’s current fiscal trajectory. A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and 100 percent of GDP. More importantly, every study except two finds a negative relationship between high levels of government debt and economic growth. This is true even for studies that find no common threshold. The empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases. The current fiscal trajectory of the United States means that in the coming 30-year period, the effects of a large and growing public debt ratio on economic growth could amount to a loss of $4 trillion or $5 trillion in real GDP, or as much as $13,000 per capita, by 2049.