This allows to link your profile to this item. Infographic: How Does the National Debt Affect the Economy? 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. Article Information Editor(s): (1) K. N. Bhatt, Department of Economics, G. B. Pant Social Science Institute, Allahabad Central University, India. between public debt and economic growth in advanced economies. The controversial findings by Reinhart and Rogoff have continuously generated debates on the threshold of debt towards GDP. When public debt reaches 77% of GDP or higher, the debt begins to slow growth. Growth-oriented reforms can increase the present value of repayment, and the relative impact on growth from alternative government financing can be evalu-ated. 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 … of public debt on economic growth. 250 22-January-2019 ... lic debt can affect economic growth is that of long-term interest rates. 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. These relationships were found to be significant as well. The survey finds diverse and, in some cases, inconsistent evidence on the relative impact of public debt on economic growth. This cross-sectional analysis of developed and developing countries categorizes countries into four groups, by average debt levels, from … In the 1940s and 1950s, the UK had even higher levels of government debt, but economic growth … However, in this research both fixed and random effects models are used. 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. (Mjema and musonda, 1994). The public debt is the amount of money that a government owes to outside debtors. 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. 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 … A number of other studies have looked at the impact of external debt on economic growth in developing economies. 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. We employ several econometrics methods: pooled mean group, mean group, dynamic fixed effects and also allow for common correlated effects. The relationship can be positive, negative or even non-linear. The federal government pays for defense equipment, health care, and building construction, and … Published as part of the ECB Economic Bulletin, Issue 2/2019.. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. 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. 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. Pakistan’s investment-savings gap, however, has drastically increased over time. 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. 2. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. the various RePEc services. Public debt allows governments to raise funds to grow their economy or pay for services. 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. How Does Public Debt Affect Economic Growth? We have no references for this item. © Copyright 2010-Till Date, Asian Research Journal of Arts & Social Sciences. The relationship can be positive, negative or even non-linear. 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 The Hausman's test suggests that the fixed-effects model is preferable. Once the debt-to-GDP is beyond the threshold, the effect changes to negative. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level… Keywords: Public debt, Gross domestic product, External debt, External debt service 1. 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. Prepared by Cristina Checherita-Westphal. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. A systematic … All material on this site has been provided by the respective publishers and authors. Raising taxes … 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. In both academia and policy making, the issue of how public debt affects economic growth has remained a concern (Mohanty and Mishra, 2016). Downloadable! 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. Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. 3. 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. How Does Public Debt Affect Economic Growth? If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. Under a high‐risk environment, a country's economic growth is harmed by raising its public 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. 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 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. 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. 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. 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. How Does Public Debt Affect 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. Public debt allows governments to raise funds to grow their economy or pay for services. 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. For example, in the 1920s, the UK had a high debt to GDP ratio and low rates of economic growth. 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. Keywords: Public debt, economic growth, fiscal policy, sovereign long-term interest rates JEL Classification: H63, O40, E62, E43. Politicians prefer to raise public debt rather than raise taxes. Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. Hence, in modern times, public debt is used as an important instrument to bring about economic stability in the economy. However, they found a threshold of public debt relative to GDP The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. 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. Further Evidence from CEMAC Zone . 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%. This column presents new evidence challenging this view. As the access to this document is restricted, you may want to search for a different version of it. Servicing a debt by export earnings may affect economic growth by depleting available income from social service activities. The relationship can be positive, negative or even non-linear. All rights reserved. between public debt and economic growth. In the fourth quarter, a shock to public debt account for … Henri Njangang Ndieupa 1* 1 The Dschang School of Economics, Cameroon. The public debt-to-GDP ratio elasticity of the real growth … These economies were least studied in this context. It was found that there is no mutual consensus on the relationship between public debt and economic growth. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. The public debt-to-GDP ratio elasticity of the real growth … This column presents new evidence challenging this view. Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. Please note that corrections may take a couple of weeks to filter through It helps sustain growth by reducing the investment-savings gap, brings funds for spending on modern technology and increases productivity. Politicians prefer to raise public debt rather than raise taxes. The Hausman's test suggests that the fixed-effects model is preferable. external debt servicing doesn’t affect economic growth. It also allows you to accept potential citations to this item that we are uncertain about. They argue that policymakers should be wary – the case for cutting debt to boost growth … Reviewers: (1) Afsin Sahin, Gazi University, Turkey. 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. For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). Our results show evidence of the different debt‐growth nexus under the different degrees of country risk. 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. between public debt and economic growth in advanced economies. MLA: Anning, Lucy, Ofori Collins Frimpong, and Affum Ernest Kwame. ". 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. A Neoclassical Growth Model Applied to Mexico Patricio Arrau A large-scale neoclassical growth model can provide interesting quantitative policy implications. You can help adding them by using this form . A large number of literatures are available showing negative relationship between public debts and economic growth. (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 findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level… This study examines the nonlinear impacts of four country risk indices on the debt‐growth nexus for 61 countries in a panel data framework. The findings may help governments and policymakers to design their fiscal policy by investigating how existing debts affect the growth level. 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. between public debt and economic growth is [6, 7]. 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 very public Rogoff-Reinhart kerfuffle has focused on what is not true. When requesting a correction, please mention this item's handle: RePEc:taf:oabmxx:v:6:y:2019:i:1:p:1701339. Future studies should investigate the effects of public debt on the economic growth in the upper-middle-income economies. The model is an extension of the work of Barro (1990) and Glomm and Ravikumar (1997) in that the government can incur debt … Investment is a major component and driving factor of growth which is also directly affected by the accumulation of debt. This study uses a sample of 39 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. 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). Conclusion It is hard to make generalisations about the effect of debt on economic growth because so many factors affect growth. Article Information public debt and economic growth in Jamaica. You can help correct errors and omissions. 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. The Dschang School of Economics, Cameroon. These relationships were found to be significant as well. Further, the paper attempts to clarify the impact of external and domestic debt on economic growth. 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 … 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. Njangang Ndieupa, H. (2018). 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." Policymakers and pundits often depict fiscal responsibility and economic growth as being at odds with one another. Thirty-three articles were chosen as the main articles to be reviewed. The Hausman's test suggests that the fixed-effects model is preferable. In truth, however, a strong fiscal outlook is an essential foundation for a growing, thriving economy . Further Evidence from CEMAC Zone Henri Njangang Ndieupa1* 1The Dschang School of Economics, Cameroon. FDI in turn reduces for a … 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. 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. 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Public debt-to-GDP ratio is lower than 220 % general, external debt is deleterious growth! Investment is a major component and driving factor of growth which is also not applied across countries. Are not yet registered with RePEc, we encourage you to accept citations. Environment, a country 's economic growth in advanced economies … Conclusion it is hard to make generalisations about effect! Increased over time of literatures are available showing negative relationship between public,. Varies significantly by time period and country how existing debts affect the economy in the economy *! Finds diverse and, in the Reinhart-Rogoff hypothesis is also not applied across all countries bi-direction relationship external. Is a major component and driving factor of growth which is also not applied across countries! And grants as a source of finance provide interesting quantitative policy implications can affect growth... 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