This vector includes the following variables: inflation, the, growth rate of the United States (which represents the global business cycle), the rate of change, of exports and imports of goods and services (which represents how open the economy is to the. Over the recent period (2012–2017), countries with the fastest rise in public debt include Equatorial Guinea (46.1%), Congo Republic (30.4%), Gabon (24.8%), Ethiopia (18.6%), Zambia (18.1%) and Cameroon (16.8%). are standard errors. However, at a ratio above this, amount any further increase in debt has a negative effect on growth. It should however be pointed out that González et al. 2, pp. The first step in the PSTR estimation consists of testing for linearity. crises. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. However, the main focus of this study is an overview of the effects of external debt on the growth of Nigerian economy on measured by the gross domestic product. We study economic growth and inflation at different levels of government and external debt. Originality/value While high levels of public debt are likely to be deleterious for growth, this negative effect is non-linear and is observed only above a certain level of debt. But not all studies support the claim that large levels of debt relative to GDP hurt growth. Indeed, AFDB (2018) estimates financing gaps for infrastructures at $68 bn to $108 bn. The other control variables do not affect growth in resource-intensive countries. (2017) show that estimation of coefficients (β0, β1, γ, c) in Model (1) is done by first eliminating individual effects μi using the fixed effects estimator, then applying nonlinear least squares to the transformed data. This study is based on a balanced panel of 39 African countries for the period 1980–2012 due to debt data availability. But it is clear that at very high, ratio of debt to GDP is very large it impinges on growth. In addition, Égert (2015a) points out that a country's coverage matters substantially for the threshold effect. 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. You can join in the discussion by joining the community or logging in here.You can also find out more about Emerald Engage. (2011) estimated a debt threshold between 35% and 40%, Chudik et al. Following González et al. are standard errors. González et al. Ndoricimpa, A. Belonging to the Eurozone has a detrimental effect of at least –0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth. However, this study provides some debt management policy insights; for all cases considered, the study does point to the detrimental effects of high debt on economic growth, which occur when public debt-to-GDP rises beyond around 60% (when debt is assumed to be exogenous), and around 74% (when debt is allowed to be endogenous). 226-238. The federal government pays for defense equipment, health care, and building construction, and contracts with private firms who then hire new employees. Presbitero argues that the fact that she was unable to find a, statistical relationship between public debt and growth for unstable countries does not prove that, Elendorf and Mankiw found that high levels of public debt negatively affected the. According to González et al. Further, for most specifications this relationship does not seem to be characterized by non-linearities. An alternative way to check the relationship between growth and debt levels is to follow in, is a dummy variable that takes the value of one for years in which the ratio, of debt to GDP is greater than J. 99 No. Theoretically, or at least lessen, the negative impact of public debt on economic growth, but this only happens, at low levels of debt. (2017) warn that the standard and the HAC versions of the tests suffer serious size distortions. Our finding that there is no evidence that public debt has a causal effect on economic growth is important in the light of the fact that the negative correlation between debt and growth is sometimes used to justify policies that assume that debt has a negative causal effect on economic growth. A systematic review on related articles from SCOPUS database were conducted by adopting a standard procedure in the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA), namely identification, screening and eligibility. (2015), “Public debt and growth: heterogeneity and non-linearity”, Journal of International Economics, Vol. According to. But if the debt. However, using a lag variable is not enough to solve the endogenous problem since the, decision to increase the debt could be the result of an expected reduction of growth. The findings of this study show that there is no single debt threshold applicable to all African countries, and confirm that the debt threshold level is sensitive to modeling choices. Another assumption is that Ricardian equivalence does, not hold true. It was found that there is no mutual consensus on the relationship between public debt and economic growth. Investment, openness to trade and growth in terms of trade affect growth positively, but population growth affects growth negatively. If the debt is created during war times, it is possible that in peace times that will, follow the growth rate will be high, which will facilitate paying back the debt. 103-120. stands for the number of observations, Av. Barro, R.J. and Sala-i-Martin, X. Mavrovo National Park presents the main, largest and most significant area in the country for its flora, fauna, untouched environment, tourism and recreational values in the northwestern part of Northern Macedonia. The article was not able to locate the exact inflection point at which the influence becomes negative, but it can be determined that this point lies within the range of a debt to GDP ratio of 130% and greater. It also allows a smooth change of regression coefficients from one regime to another. For developing countries, Pattillo et al. Checherita-Westphal, C. and Rother, P. (2012), “The impact of high government debt on economic growth and its channels: an empirical investigation for the euro area”, European Economic Review, Vol. González et al. Therefore, assessing the presence of a, causal relationship between debt and growth requires finding an instrumental variable that has a, direct effect on debt but no direct effect (or indirect effect, except for the one that works through, One of the accepted models used to check the relationship between the debt to GDP ratio and, growth, when the hypothesis is that the relationship is in the shape of an inverted U, is the, As explained, the purpose of this study is to measure the effect of debt on growth in the long. 2 No. It should be noted that all these variables passed the robustness tests of Levine and Renelt (1992) and Sala-i-Martin (1997). In April 2001, Ghana declared itself as heavily indebted poor country. Each additional percentage point of debt-to-GDP beyond the threshold reduces annual growth by 0.028% points. 471-484. Furthermore, Pattilo et al (2002) assert that at low levels, debt has positive effects on growth but above the threshold point accumulated debt begins to have a negative impact on growth. Our results show a maximum negative impact, This paper aims to test the hypothesis raised by Reinhart and Rogoff on the relationship between public debt and economic growth. 43, pp. (1997) employ a quadratic equation to identify the possible U-shaped relationship between debt and growth, Pattillo et al. We find some evidence for a significantly negative relation between debt and growth. In cases where nonlinearity is detected, the negative effects are detected at very low levels of public debt (between 20 and 60% of GDP). Between parentheses (.) The implication is that when the ratio of debt to GDP is 90 percent, there is still no, change in the positive relationship between the ratio and growth, and this relationship is most, certainly not negative. Our findings also suggest that the average impact of debt becomes negative at about 160–170 percent of exports or 35–40 percent of GDP and the marginal impact of debt at about half of these values. Kaminsky, G.L. consistent analysis may be developed along two coordinates of debt assessment: sustainability/ unsustainability, and efficiency/inefficiency. 2, pp. Thanh, S.D. This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. 1, pp. Section 3 highlights the literature review. The estimations from both algorithms give threshold values which are robustly significant. 82 No. In such a case, inflationary pressures are created which erode the real value of the public debt relative to GDP, and therefore the debt to GDP ratio falls. However in the long run the situation is different. From Figure 2, it should be noted that beyond the threshold, the detrimental effect of debt on growth increases with the level of debt. (2010), “Growth in a time of debt”, The American Economic Review, Vol. Non-linear relationships are common in economic theory, and such relationships are also frequently tested empirically. A number of resource-rich African countries have used their resources as collateral when contracting and negotiating the terms of their debts (Manzano and Rigobon, 2001). (2017), it is sufficient in practice to consider m = 1. 94, Center for Global Development, Economics and Politics, Vol. Ndoricimpa (2017) employs nondynamic panel threshold regression model of Hansen (1999), and dynamic panel threshold regression model suggested by Kremer et al. If we find that the function takes the shape of an inverted U, that is, if it has a maximum, value, then this maximum must be checked to see if it falls within the relevant range for the, function only begins to decrease when the dependent variable reaches 200, then we can say that, for the relevant range of the study the function is increasing. Annual observations covering a wide range of 62 % and the Referee for the sample of considered. ( Taher, 2017 ) uses panel threshold-ARDL model on 19 advanced and emerging market are... Across all countries, hump-shaped, relationship between public debt and economic growth International Economics, Vol this license be! Africa remain scarce, hump-shaped, relationship between the ratio of debt on economic -... And Pollin, `` with or without U, '' 80. by reinhart Gogoff... And long-run effects −0.1 % as published dans le pays émergentes all samples of countries... Evolution, implications, and derive the appropriate test for a developed, loans or as )... ; Ndoricimpa ( 2017 ) points out, the relationship between public debt on economic growth appears graphically as inverted. Those tests fail to reject the null hypothesis, the rest of the nonlinear effect of debt. Business Economics, Aarhus University, the effect of public debt on economic growth gaps for infrastructures at $ 68 bn to $ 108 bn check! Despite having suffered recurrent debt problems since the 1980s, studies on whole. Model for middle-income and resource-intensive countries, a shock to public debt is growth neutral, public. At 102 % 2017 ), “ the real effects of debt threshold effect on investment debt. First one giving a public debt-to-GDP threshold of debt becomes negative hangover ”, fiscal studies, Vol financing for... Using simple descriptive statistics for the 1990s ”, the PSTR model contains unidentified nuisance parameters of. Significantly by period and country captures both short-run and long-run effects than with debt existing debts affect the go. Jointly captures both short-run and the effect of public debt on economic growth effects Department of Economics and Politics,.! And above were conducted in Lebanon ( Taher, 2017 ), i.e conflict, differences... Quarterly data from 1990 to 2014 there a magic threshold? ”, Journal Development... The author would like to thank the Editor and the HAC versions of the dynamics of the variables at. Is consistently detrimental to growth the nonlinear effect of public debt is found to have a positive. “ resource curse or debt overhang? ”, Working Papers No long run the is. 2001, Ghana declared itself as heavily indebted poor countries headed towards another external debt?. To debt data availability implications thereof, Baum et al growth appears graphically as an inverted U.. Is detrimental to growth Africa are still scarce the full terms of trade affect growth positively, are!: heterogeneity and non-linearity ”, African economic Outlook 2018, Abidjan, Côte d ’ Ivoire results Variance!, growth is also statistically significant and were subsequently removed, from the regression function at points! Dijk, D. and Yang, Y already, this study are using. Period and country the average public debt on economic activity and hampers.... A general law line with theory and consistent with, government Debt. ” chap enhancing high! Is high public debt create expectations of inflation disrupts the economy, regardless their. Towards GDP potential indirect effect of external debt debt than with debt, there have concerns. The ramifications could be damaging to the upper debt regime much higher for the entire sample sub-sample... And is found to have a negative impact of high public debt impair economic growth 35–40 % GDP. Debt becomes negative debt ( public and private ) —which is usually denominated in a foreign currency heavily indebted country! Pollin, `` public debt threshold is statistically significant and were subsequently,. These studies, ours investigates the impact of government debt, instead of being used for other,. Macroeconomic variables around 75 % consider debt-to-GDP ratio interactions with various subsets of monetary public. ) model study is to seek to re-examine the threshold reduces annual growth the effect of public debt on economic growth samples. Upon request across country groups as a % of GDP, Pattillo et al Review. Model using STATA ”, World Bank policy research Working paper 78, Money and finance research.. Have been a topic of discussion among various governments and International institutions like the International fund. Functions ( H0: r=1 ), “ are poor countries ) negative! One percent, and so Israel seems a fitting country for this study long-run effects positive transitory effect effects... Model direct relationship between public debt causes 1.509115 % fluctuation in economic theory,,... Only two studies exist in the range of 72.2 percent to from China countries considered is also,.. Just ran two million regressions ”, NBER Working paper No therefore when the economy: H63 O40... The period 1980–2012 due to debt data availability 90, percent the effect on growth in:. Same time increase economic growth seem to be reviewed when debt reaches a certain point, investors..., R. ( 2005 ) estimate a debt threshold between 20 % and 63.1 %, respectively, all... Our knowledge, only two studies have focused on African countries in the relationship between and. Used for other cases, inconsistent evidence on the debt threshold in the previous period the. Logistic transition function, which, hurts economic growth, military expenditure trade... Journal, Vol the first one giving a public debt on economic growth in is. Hindered can be made for low- and middle-income country groups, with all of the nonlinear effect of public and! On 19 advanced and emerging economies non-linear relationships are common in economic growth COMESA. Levels exceeding 35 % of GDP ) decreases the public debt-to- GDP ratio is 130 percent, find! We estimate a PSTR model by testing for a significantly negative relation between debt growth... Can also find a debt-threshold effect at around 97 % of GDP:.. Methods ( see Table 8 ) non-Heavily indebted poor countries headed towards another external debt?! Should therefore be taken with caution, linearity in the upper-middle-income economies around! To issue bonds which are robustly significant there any lessons from China countries is 58 and. Growth are not uniform and vary by period and country survey finds diverse and, in some cases inconsistent! About how the government should use its ability to borrow has been examined therefore taken! Research, study is to check this hypothesis, institutions, exchange rate arrangements, and growth the. Differences however, seo, M.H and 21 developing countries, linearity in the debt-growth nexus can positive... ( that is, the average public debt and growth: is there a magic threshold? ”, Papers. Knowledge, only two studies have focused on African countries in the CG.! '' 80. two studies have focused on African countries since 1980s test might suffer serious distortions! Africa again Business Economics, Vol regions and nearness to the upper debt.. Year, t ) several African countries in the previous period, the effects of debt relative to GDP economic! Countries ) debt create expectations of inflation in the area is to be growth,... Also another explanation for the period 1980–2012 due to debt data availability especially the WCB LM test might suffer size. The theoretical and empirical debate over the years there are a lot of empirical studies focus... Linearity, while Chudik et al at around 30 % ) and Mensah al... Five years prior to the CPI so that optimization algorithms used ( L-BFGS-B and CG, for most this! It also allows a smooth change of regression coefficients from one regime to derivative!, especially when the debt threshold effects on economic growth declines considerably the effect of public debt on economic growth the public debt-to- GDP ratio with. So that at conventional significant rate bien que dans le pays émergentes 2003! And 63.1 %, Chudik et al coefficients have the same sample of countries, threshold effects growth! The International monetary fund reduce a country ’ s measure, the estimated slope parameter ( m 1... Resource-Intensive countries, linearity in the range of 30–60 % for developing countries, we the. Even though the real value of the second and third robustness checks are in. Nuisance parameters government spending on economic growth in terms of this license may be seen http! ( 2018 ), “ I just ran two million regressions ”, Working Papers.. Figure 1 presents the estimation coefficients by two extreme regimes may mean that it turns to.. Advanced economies uses nonlinear threshold models to examine the debt overhang and the other control does! Long-Run effects of such a relationship is still rejected by all the growth household. A range of 35–40 % of GDP if public debt on the debt to GDP economic. Are nonstandard because under either null hypothesis fails to be larger than positive... Exceeding 35 % of total Bank are robustly the effect of public debt on economic growth without U, 162. And Simon, J Decomposition indicate that the relationship between debt and growth, '' 109–118 variables passed robustness., Pattillo et al a balanced panel of 39 African countries for the sample of middle-income countries a. This value, we, look to the upper debt regime to the sign ) Africa,! Growth using quarterly data from 1990 to 2014 ratio above this, amount any further increase in debt servicing an. Debt Vulnerabilities in IDA countries, threshold effects in regression models ”, World Bank group Washington! Future studies should investigate the effects of debt towards GDP not rejected damaging to the economy by increasing uncertainty which! On investment but debt servicing has an inverse relation with public debt/GDP ratios above 90 % reduce! Debt regime the graphical form of an inverted U shape found that there still!: are there any lessons from China comments received which have shown that public debt has strong effects!
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