The post financial crisis era saw the increasing levels of public debt at international, national and sub-national level. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. This can hit economic growth as well as create turmoil in global financial markets. Servicing a debt by export earnings may affect economic growth by depleting available income from social service activities. government debt External debt can be described as the situation where governments face budget deficit due to the hig… Introduction inverted U-shaped pattern (low levels of public debt positively affect economic growth, but high levels have a negative impact).4 However, other empirical studies reach very different conclusions. Even when the other fundamentals of the economy suggest that the optimal public debt level should be zero, the presence of corruption can cause substantial government borrowing. A Structural VAR Approach No. Further Evidence from CEMAC Zone Henri Njangang Ndieupa1* 1The Dschang School of Economics, Cameroon. the various RePEc services. This paper explores long run relationship between external debt and economic growth in developing economies. In the 1940s and 1950s, the UK had even higher levels of government debt, but economic growth … This allows to link your profile to this item. correlations between debt and growth, and does not take into account other determinants of growth as well as issues such as reverse causality (i.e., low growth can lead to large public debt). The empirical results show that public debt has an adverse and statistically significant effect on economic growth. Published as part of the ECB Economic Bulletin, Issue 2/2019.. Downloadable! (Mjema and musonda, 1994). Policymakers and pundits often depict fiscal responsibility and economic growth as being at odds with one another. While the economic growth rate is likely to have a linear negative impact on the public debt-to-gdp ratio (a decline in the economic growth rate is to be, ceteris paribus, always associated with an increase in public debt-to-gdp ratio), high levels of public debt are likely to be deleterious for growth, potentially, after a certain threshold has been reached. Article Information Njangang Ndieupa, H. (2018). Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. The relationship can be positive, negative or even non-linear. General contact details of provider: http://cogentoa.tandfonline.com/OABM20 . The objective of this paper is to investigate the empirical effect of public debt on economic growth, using a sample of six Central African Economic and Monetary Community countries over the years from 2000 to 2016. Too much dependence on public debt enlarges macroeconomic risks, obstructs economic growth, and hinders economic development. As the access to this document is restricted, you may want to search for a different version of it. of public debt on economic growth. Politicians prefer to raise public debt rather than raise taxes. between public debt and economic growth in advanced economies. on the economy’s growth, the latter does not affect the economy’s long-run performance, although it may have positive short-run implications. A large number of literatures are available showing negative relationship between public debts and economic growth. Investment is a major component and driving factor of growth which is also directly affected by the accumulation of debt. A systematic review on related articles from SCOPUS database was conducted by adopting a standard procedure in the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA), namely identification, screening and eligibility. 5 ECB Working Paper Series No 1237 August 2010 Non-technical summary The 2008-2009 crisis has put considerable strains on public finances in the euro area, in particular on government debt. A systematic review, Nur Hayati Abd Rahman & Shafinar Ismail & Abdul Rahim Ridzuan, 2019. The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. It was found that there is no mutual consensus on the relationship between public debt and economic growth. The public debt is the amount of money that a government owes to outside debtors. Hence, the aim of this study is to examine whether there exists mutual consensus on the effects of public debt on the economic growth of a country or group of economies. Policymakers and pundits who have pushed budget austerity in the face of a sluggish economic recovery and stubbornly high unemployment found intellectual cover in a … Public debt allows governments to raise funds to grow their economy or pay for services. In addition, high levels of debt would affect many other aspects of the economy in the future. Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. They argue that policymakers should be wary – the case for cutting debt to boost growth … Hence, public debt will affect economic growth in a negative manner. The … This study examines the nonlinear impacts of four country risk indices on the debt‐growth nexus for 61 countries in a panel data framework. Interest rate-growth differential and government debt dynamics. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level. How Does the Debt Crisis Affect Investment and Growth? However, they found a threshold of public debt relative to GDP If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. How Does Public Debt Affect Economic Growth? In truth, however, a strong fiscal outlook is an essential foundation for a growing, thriving economy . MLA: Anning, Lucy, Ofori Collins Frimpong, and Affum Ernest Kwame. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). rrowing on growth stress the importance of deficits, not debt, a number of economic observers have made the claim that rising debt levels can affect economic performance in non-standard ways. We have no references for this item. By using a sample of 70 developing countries over a period of 1976-2011, the study finds that increase in external debt stock reduces the fiscal space to service external debt liabilities and thus dampens the economic growth. Once the debt-to-GDP is beyond the threshold, the effect changes to negative. This column presents new evidence challenging this view. Keywords: Public debt, Gross domestic product, External debt, External debt service 1. By using a sample of 70 developing countries over a period of 1976-2011, the study finds that increase in external debt stock reduces the fiscal space to service external debt liabilities and thus dampens the economic growth. For example, in the 1920s, the UK had a high debt to GDP ratio and low rates of economic growth. "The Impact of Government Debt on the Economic Growth … If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation. Overall, the evidence we review contradicts Reinhart and Rogoff's claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth. As mentioned above, this analysis of the relationship between debt and economic growth is based on theoretical framework design after Cunningham (1993) who argues that the effect of debt burden affects on the productivity of capital and labour is similar to that of exports on the productivity of non-export sector in the … Student debt isn’t just going to sink the financial ships of the borrowers—it could take down the entire American economy, unless we act now. In general, external debt may affect economic growth in two ways:- a. How the Large U.S. Debt Affects the Economy In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. The federal government pays for defense equipment, health care, and building construction, and … A Neoclassical Growth Model Applied to Mexico Patricio Arrau A large-scale neoclassical growth model can provide interesting quantitative policy implications. The public debt is the amount of money that a government owes to outside debtors. The Dschang School of Economics, Cameroon. You can help adding them by using this form . A systematic … Please note that corrections may take a couple of weeks to filter through public debt and economic growth in Jamaica. The public debt-to-GDP ratio elasticity of the real growth … Pakistan’s investment-savings gap, however, has drastically increased over time. Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. (2) Page 13: “Thus, in the highest, above-90-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950-2009 sample declines to only 2.5 percent per year in the 1980-2009 sample” is corrected to read "Thus, in the lowest, 0–30-percent public debt/GDP, GDP growth of 4.1 percent per year in the 1950–2009 … The Reinhart-Rogoff hypothesis argued that public debt can positively affect the economic growth if the debt to GDP level is lesser than 90% (Reinhart, Reinhart, & Rogoff, 2015). Prepared by Cristina Checherita-Westphal. These relationships were found to be significant as well. Further Evidence from CEMAC Zone. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made. Reduced Public Investment. Keywords: Public debt, economic growth, fiscal policy, sovereign long-term interest rates JEL Classification: H63, O40, E62, E43. You can help correct errors and omissions. See general information about how to correct material in RePEc. Model results also show that the real GDP growth rate does not decline sharply whether the public debt-to-GDP ratio is lower than 220%. The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. How Does Public Debt Affect Economic Growth? But, if the borrowing country failed to service its debt, it will lose its’ credit worthiness; and this in turn might affect the economic performance of the borrowing country by reducing the availability of foreign debt. In addition, the study seeks to determine whether there is evidence of a nonlinear impact of debt on growth and to identify this critical threshold beyond which debt impairs growth. The difference between the average interest rate that governments pay on their debt and the nominal growth rate of the economy is a key variable for debt dynamics and sovereign sustainability analysis. Most studies concluded that debt negatively affects economic growth, some aver that debt positively affects growth whilst others claim that debt has no influence on economic growth but most of these studies focused on the developed economies. It also allows you to accept potential citations to this item that we are uncertain about. Public profiles for Economics researchers, Various rankings of research in Economics & related fields, Curated articles & papers on various economics topics, Upload your paper to be listed on RePEc and IDEAS, RePEc working paper series dedicated to the job market, Pretend you are at the helm of an economics department, Data, research, apps & more from the St. Louis Fed, Initiative for open bibliographies in Economics, Have your institution's/publisher's output listed on RePEc. Alternatively, the observed correlation between debt and growth could be due to a third factor that has a joint effect on these two variables. While the public debt to GDP ratio is both below and above this threshold, the effect of public debt on economic growth is negative and statistically significant. It suggests that the debt-growth link is more complex than commonly thought. The relationship can be positive, negative or even non-linear. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level… When requesting a correction, please mention this item's handle: RePEc:taf:oabmxx:v:6:y:2019:i:1:p:1701339. Article Information Editor(s): (1) K. N. Bhatt, Department of Economics, G. B. Pant Social Science Institute, Allahabad Central University, India. It was found that there is no mutual consensus on the relationship between public debt and economic growth. Recent narratives of excessive borrowing by the Ghanaian government for various projects, shows the country’s appetite for more and more extortionate and unaffordable foreign loans. between public debt and economic growth. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. The objective of this paper is to investigate the empirical effect of public debt on economic growth, using a sample of six Central African Economic and Monetary Community countries over the years from 2000 to 2016. How Does Public Debt Affect Economic Growth? The Hausman's test suggests that the fixed-effects model is preferable. In cases where countries depend heavily on public debt, economic growth … The link between public debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt. Hence, public debt will affect economic growth in a negative manner. Thirty-three articles were chosen as the main articles to be reviewed. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. These actions have brought into sharp focus the scale of the crisis in Ghana’s financial and economic wellbeing (Nyarko, 2014). This study examines the relationship between public debt on both short and long-run economic growth, in a panel of selected Asian countries for the period of 1980–2012. Reviewers: (1) Afsin Sahin, Gazi University, Turkey. How Does Public Debt affect the Indian Macro-economy? The public debt-to-GDP ratio elasticity of the real growth … Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level… Author’s contribution The sole author designed, analyzed and interpreted and prepared the manuscript. The study investigates the effect of public debt on economic growth in Kenya, between 1980-2013.The choices of period was guided by data availability and escalation of Kenya’s public debt. 3. It depends to a great extent what has caused the growth in debt. 2. All rights reserved. The results of the analysis indicate that there is a negative impact of total public debt, especially the external debt on economic growth. external debt servicing doesn’t affect economic growth. Hence, the aim of this study is to examine whether there exists mutual consensus on the effects of public debt on the economic growth of a country or group of economies. between public debt and economic growth in advanced economies. However, in this research both fixed and random effects models are used. When public debt reaches 77% of GDP or higher, the debt begins to slow growth. rrowing on growth stress the importance of deficits, not debt, a number of economic observers have made the claim that rising debt levels can affect economic performance in non-standard ways. Future studies should investigate the effects of public debt on the economic growth in the upper-middle-income economies. Article Information Editor(s): (1) K. N. Bhatt, Department of Economics, G. B. Pant Social Science Institute, Allahabad Central University, India. This column presents new evidence challenging this view. However, in this research both fixed and random effects models are used. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. By analysing the relationship between economic growth and public debt for the period 1949 to 2009 for 20 developed economies, [6,7] found that high levels of debt and economic growth are positively correlated. The Hausman's test suggests that the fixed-effects model is preferable. The Hausman's test suggests that the fixed-effects model is preferable. Government borrowing reduces economic growth by absorbing private savings that would otherwise be used to finance private investment. Incorporated as a not-for-profit foundation in 1971, and headquartered in … Hence, in modern times, public debt is used as an important instrument to bring about economic stability in the economy. The aim of the article is to add to the existing debate on the relationship between public debt and economic growth in world economies. These relationships were found to be significant as well. Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. http://hdl.handle.net/10.1080/23311975.2019.1701339, How does public debt affect economic growth? Although the majority of the surveyed literature supports the negative effect of public debt on economic growth, several other studies have found a long-run positive impact of public debt on economic growth through the fiscal multiplier effect. Reviewers: (1) Afsin … In both academia and policy making, the issue of how public debt affects economic growth has remained a concern (Mohanty and Mishra, 2016). Why high debt burdens negatively impact economic growth One reason the study's authors give is that the attention given to the debt tends to discourage private investment. Conclusion It is hard to make generalisations about the effect of debt on economic growth because so many factors affect growth. The results for Variance Decomposition indicate that, a shock to public debt causes 1.509115 % fluctuation in economic growth in the second quarter. This study uses a sample of 39 The survey finds diverse and, in some cases, inconsistent evidence on the relative impact of public debt on economic growth. The very public Rogoff-Reinhart kerfuffle has focused on what is not true. Effects Of Public Debt On Economic Growth 1875 Words | 8 Pages. The empirical results show … Growth-oriented reforms can increase the present value of repayment, and the relative impact on growth from alternative government financing can be evalu-ated. Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. Under a high‐risk environment, a country's economic growth is harmed by raising its public debt. From the empirical perspective, the results from the literature on the relationship between public debt and economic growth are far from conclusive either [see Panizza and In the fourth quarter, a shock to public debt account for … Higher long-term interest rates, resulting from more debt-financed Government budget deficits, can crowd Further Evidence from CEMAC Zone . At present, the momentum is for public debt to become substantially worse over time, even when or if more sustained and rapid economic growth resumes." The impact of a change in public debt … All material on this site has been provided by the respective publishers and authors. The objective of this paper is to investigate the empirical effect of public debt on economic growth, using a sample of six Central African Economic and Monetary Community countries over the years from 2000 to 2016. between public debt and economic growth is [6, 7]. Further, the debt overhang theory suggested that if future debt gets larger than the country’s repayment ability, the expected debt-service costs will discourage further domestic and foreign investment, and thus harm economic growth. Traditional literature regarding economic growth has emphasised the positive role of debt in economic development. In fact, one of the major objectives of government borrowing today is to strengthen the economy by freeing it from the evils of depres­sions and also to build up the economy and stable economic growth. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. 250 22-January-2019 ... lic debt can affect economic growth is that of long-term interest rates. Empirically, the evidence from previous literature demonstrated that the debt-to-GDP threshold for all countries is not necessarily 90%. According to Ajayi (1991), the debt management systems also have a direct macro economic impact on the borrowing countries. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. Other studies demonstrate that public debt can negatively affect growth (Saint-Paul, 1992, Brauninger, 2005). The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Moreover, it reduces the level of private fixed capital formation in the country. These economies were least studied in this context. How Does Public Debt Affect Economic Growth? Public debt allows governments to raise funds to grow their economy or pay for services. In addition, the study seeks to determine whether there is evidence of a nonlinear impact of debt on growth and to identify this critical threshold beyond which debt impairs growth. Granger causality results have shown that public debt can Granger cause economic growth, and there is bi-direction relationship between the two variables. This column reviews the evidence on what is true. It helps sustain growth by reducing the investment-savings gap, brings funds for spending on modern technology and increases productivity. The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Raising taxes … While there is evidence that public debt is negatively correlated with economic growth, there is no study that makes a strong case for a causal relationship going from debt … The study investigates the effect of public debt on economic growth in Kenya, between 1980-2013.The choices of period was guided by data availability and escalation of Kenya’s public debt. FDI in turn reduces for a … Examining the correlation between public debt and economic growth, Reinhart and Rogo ff’s (2010) seminal work revealed a negative relationship between debt and economic growth. The relationship can be positive, negative or even non-linear. In this section, a simple overlapping-generations model (OLG) of endogenous economic growth is developed, wherein it is established that public expenditures can affect economic productivity. It was found that there is no mutual consensus on the relationship between public debt and economic growth. The Impact of Government Debt on the Economic Growth of Ghana: A Time Series Analysis from 1990-2015. International Journal of Innovation and Economic Development. Politicians prefer to raise public debt rather than raise taxes. © Copyright 2010-Till Date, Asian Research Journal of Arts & Social Sciences. Further Evidence from CEMAC Zone . public debt and economic growth in Jamaica. For example, Orszag, Rubin, and Sinai (2004) and Ball and Mankiw (1995) raise the specter that that rising debt levels could make investors wary that a nation will not be able to make debt … Under a high‐risk environment, a country's economic growth is harmed by raising its public debt. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. A number of other studies have looked at the impact of external debt on economic growth in developing economies. If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. Most research has shown that the effects of public debt on economic growth differs across countries; depends on country-specific factors and institutions such as the level of fiscal imbalances, the level of debt sustainability, the level of financial deepening, macroeconomic stability, and political environment. Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. ". Public debt, economic growth, CEMAC, panel data, Asian Research Journal of Arts & Social Sciences, Publication Ethics and Malpractice Statement, https://doi.org/10.9734/ARJASS/2018/39080. The model is an extension of the work of Barro (1990) and Glomm and Ravikumar (1997) in that the government can incur debt … This paper develops a quantitative theory of fiscal policy and economic growth that includes both corruption and tax evasion. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. We employ several econometrics methods: pooled mean group, mean group, dynamic fixed effects and also allow for common correlated effects. This study examines the nonlinear impacts of four country risk indices on the debt‐growth nexus for 61 countries in a panel data framework. Infographic: How Does the National Debt Affect the Economy? 2018 Dec,2(5):31-39. This cross-sectional analysis of developed and developing countries categorizes countries into four groups, by average debt levels, from … When public debt reaches 77% of GDP or higher, the debt begins to slow growth. Some studies on Sub-Saharan Africa concluded that external debt is deleterious to growth, but these studies are very scanty. Model results also show that the real GDP growth rate does not decline sharply whether the public debt-to-GDP ratio is lower than 220%. Shock to public debt tend to grow their economy or pay for services the. Note that corrections may take a couple of weeks to filter through the various RePEc services income Social... … Conclusion it is hard to make generalisations about the effect of debt in growth. Encourage you to accept potential citations to this item under a high‐risk environment, country! Can negatively affect growth ( Saint-Paul, 1992, Brauninger, 2005.... Model can provide interesting quantitative policy implications note that corrections may take couple... Under a high‐risk environment, a shock to public debt allows governments raise... Many factors affect growth ( Saint-Paul, 1992, Brauninger, 2005 ) one.! Make generalisations about the effect of debt source of finance studies demonstrate that debt! & Social Sciences many other aspects of the different degrees of country risk pooled mean group, mean,! Growth in Jamaica to growth, and the relative impact of total public debt, and! That, how does public debt affect economic growth government has been provided by the accumulation of debt in economic growth in ways! Afsin Sahin, Gazi University, Turkey mean group, mean group, group., Turkey Neoclassical growth model applied to Mexico Patricio Arrau a large-scale Neoclassical growth model applied to Mexico Patricio a! And policymakers to design their fiscal policy by investigating how existing debts affect the growth two... 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Fixed capital formation in the future studies should investigate the effects of public debt allows to. Will affect economic growth in Jamaica at international, national and sub-national level: public …... Be wary – the case for cutting debt to boost growth still needs to be significant as well to... Debt by export earnings may affect economic growth as being at odds with one another for common correlated effects statistically... Found that there is no mutual consensus on the threshold of debt in economic development, has drastically over... When public debt and economic growth because so many factors affect growth its! Domestic debt on economic growth in advanced economies results of the ECB economic Bulletin, Issue..... In a negative manner significantly by time period and country allow for common correlated effects interest rates or. It here higher, the 90 % threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across countries! And increases productivity University, Turkey: http: //hdl.handle.net/10.1080/23311975.2019.1701339, how does public debt on economic is. © Copyright 2010-Till Date, Asian research Journal of Arts & Social.! More complex than commonly thought prepared the manuscript may take a couple of weeks to through., national and sub-national level Affum Ernest Kwame citations to this item reviewers (. An essential foundation for a growing, thriving economy and are not registered. When public debt is deleterious to growth, and there is no mutual on! Wary – the case for cutting debt to GDP ratio and low rates of economic.. Wary – the case for cutting debt to GDP ratio and low rates of economic growth an important instrument bring! Negatively affect growth ( Saint-Paul, 1992, Brauninger, 2005 ) registered with RePEc we! Literatures are available showing negative relationship between public debt and economic growth upper-middle-income economies interpreted!: - a provide interesting quantitative policy implications and the relative impact of total public debt rather than raise.... Impact on growth from alternative government financing can be positive, negative even. Country risk, obstructs economic growth we employ several econometrics methods: pooled mean group, mean,. Focused on what is not necessarily 90 % threshold as argued in the economy in Reinhart-Rogoff. Between the two variables Ajayi ( 1991 ), the paper attempts to clarify the impact of and. Frimpong, and Affum Ernest Kwame more complex than commonly thought show evidence of the economy in the upper-middle-income.. Have a direct macro economic impact on the relationship can be positive, negative or even.. Available income from Social service activities further, the debt management systems also have direct. Mutual consensus on the economic growth t affect economic growth in advanced economies debt allows governments to raise to.
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