Public debt and economic growth – economic systems matter

Ahlborn, Markus; Schweickert, Rainer

doi:10.1007/s10368-017-0396-0

Cited by 50 publications

(30 citation statements)

References 40 publications

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“…The first category supports the position that external debt decreases investment and growth (Borensztein 1990, Iyoha 2000, Were 2001, Lopes 2002, Maghyereh and Omet 2002, Berensmann 2004, Hameed et al 2008, Presbitero 2012, Guei 2019. Other studies support the opposite view, showing that external debt has a positive effect on investment and growth (Jayaraman and Lau 2009, Ahlborn and Schweickert 2015, Egbetunde 2012, Sánchez-Juárez and García-Almada 2016, Owusu-Nantwi and Erickson 2016. Finally, few empirical studies report no significant impact.…”

Section: Introductionmentioning

confidence: 64%

External Debt, Investment, and Economic Growth: A Seemingly Unrelated Regression Model for Low-Income Countries

Hakimi

Boussaada

Karmani

2019

Journal of Economic Integration

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This study analyzes whether external debt is a driving factor for investment and economic growth in low-income countries. Using data over the period 2000~2017, we performed an analysis using the 23 countries in the sample and a split-sample analysis wherein we separated less indebted countries (12) from more indebted countries (11). Empirical results of the seemingly unrelated regressions model indicate that external debt significantly decreases investment and economic growth for both the total sample and the sub-samples. In addition, we found that trade openness is positively and significantly related to the level of growth per capita. This positive association is confirmed for both the total sample and the split sample. Findings also indicate that the level of growth exerts a positive and significant effect on investment for the total sample and for less indebted countries.

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Section: Introductionmentioning

confidence: 64%

External Debt, Investment, and Economic Growth: A Seemingly Unrelated Regression Model for Low-Income Countries

Hakimi

Boussaada

Karmani

2019

Journal of Economic Integration

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“…Households and companies might subsequently consume and invest less in anticipation of future tax increases (Barro 1996 ). The private sector generally considers public debt to be an indicator of economic uncertainty (Ahlborn and Schweickert 2018 ): if sovereign debt goes up, the economic outlook deteriorates and, particularly in a future mired in economic uncertainty, the incentive to invest will be lower.…”

Section: Introductionmentioning

confidence: 99%

Debt and Private Investment: Does the EU Suffer from a Debt Overhang?

Vanlaer

Picarelli²,

Marneffe

2021

Open Econ Rev

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This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by applying an instrumental variable approach (GMM). Our results support the debt overhang hypothesis and indicate that this relationship only works through the public debt channel. In our baseline regression, a 10 percentage point increase in public debt reduced private investment by €18.32 billion, given the levels of private investment prevalent in 2016. By contrast, private debt does not appear to be a significant determinant of private investment. These results hold after controlling for a number of factors that might have caused public debt to increase and private investment to decrease. While our analysis focuses on the financial sector channel, we find no evidence that public debt tightens the credit constraints for private firms or worsens the public debt overhang. We also show that government bailouts of the financial sector, which could alleviate financial distress and boost credit provision, do not appear to be effective in mitigating the public debt overhang effect. Finally, we find evidence that the financial openness of a country does alleviate the negative impact of public debt on private investment. This might suggest that attracting foreign capital compensates for a contraction in the domestic pool of financial resources due to higher public debt levels.

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“…However, given the overall macroeconomic situation in the country, it is hard to believe that Macedonian econ- omy could sustainably bear such a high burden of public debt, without jeopardizing economic growth perspectives. As literature suggests, threshold levels of around 60% are typical for many advanced economies, Nordic countries for example (Ahlborn & Schweickert, 2018). On the other hand, emerging economies face lower thresholds, around 45% (Mencinger et al, 2015).…”

Section: Figure 1: Calculated Tps and Their 95% Confidence Intervalsmentioning

confidence: 98%

“…Also, unlike many studies that address this issue using panel data for a group of countries, we aim to make use of the country-specific conditions for a single country, North Macedonia in particular. We believe that heterogeneity between countries, even from the same geographical region, might be a source of significant disparities (Ahlborn & Schweickert, 2018), imposing a need for generalization.…”

Section: Limitationsmentioning

confidence: 99%

Public Debt Threshold in the Republic of North Macedonia

Kjosev

Noveski

Kjoseva³

2021

Manage: J. Sustainable Bus. Manage, Solutions Emerging Econ.

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Research question: Is there a non-linear relationship between public debt and economic growth in North Macedonia, in the form of an inverted U-shape? Motivation: Government consumption plays an important role in the stability of the national economy, especially in periods of economic crisis. However, a rapidly growing public debt is a concerning issue nowadays, since it might jeopardize economic growth perspectives. Economic theory suggests that public debt has non-linear impact on economic growth in the form of an inverted U-shape. In other words, it is believed that after a certain threshold, the public debt will have deleterious impact on economic growth. Idea: Given that such threshold varies significantly across countries, the aim of this paper is to calculate the turning point of the public debt impact in the Republic of North Macedonia. Tools: For this purpose, we use non-linear multiple regression model for the real GDP growth rate as a dependent variable, general government public debt-to-GDP ratio (in nominal and squared terms) as a key independent variable, as well as several other controlling variables. Since theory also suggests reverse causality between economic growth and public debt, we use two different estimation techniques (Ordinary Least Squares and Generalized Method of Moments) to deal with potential endogeneity, and to cross-validate the results. Data: In this regard, we use annual data for the period 1998 – 2019, for 14 variables in total, obtained from several different data sources. Findings: Our results show that general government debt in the Republic of North Macedonia positively affects economic growth until it reaches around 30% of GDP, whereas further indebtedness after that turning point will most likely have a negative impact. Contribution: Given that current debt level is far above the estimated turning point, the need of urgent fiscal consolidation inevitably arises. This is especially important in the light of the ongoing COVID-19 crisis, which imposed the need for strong government intervention and pointed out the importance of the fiscal space for such matter.

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Public debt and economic growth – economic systems matter

Cited by 50 publications

References 40 publications

External Debt, Investment, and Economic Growth: A Seemingly Unrelated Regression Model for Low-Income Countries

External Debt, Investment, and Economic Growth: A Seemingly Unrelated Regression Model for Low-Income Countries

Debt and Private Investment: Does the EU Suffer from a Debt Overhang?

Public Debt Threshold in the Republic of North Macedonia

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