Does Public Debt Affect Economic Growth? Panel Evidence from Central and Eastern Europe

Abstract

The paper employs a form of the panel ARDL-based error correction model (ECM) to explore the short-run and long-run relationship between public debt (and certain macroeconomic variables) and economic growth in Central and Eastern European (CEE) countries. It covers the period 2006Q1−2018Q4. The results indicate both short-term and long-term causality (except for financial development), though the marginal effects are variable-specific. There is a negative effect of public debt, interest rate and exchange rate on growth, whereas the saving rate, trade openness, financial development, fixed capital formation and population growth contribute to economic development. Thus, a responsible and saving-oriented fiscal policy, coupled with higher private sector investment, an exportoriented private sector and undervalued real exchange rate, and population growth would contribute to economic development in CEE countries.