Public Debt and Economic Growth Economic Systems Matter

Abstract

Most studies on the relationship between public debt and economic growth implicitly assume homogeneous debt effects across their samples. We -in accordance with recent literature-challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinavian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of heterogeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, while for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.

The Impact of Public Debt on Economic Growth: A Review of Contemporary Literature

“…Apart from studies that have found nonlinear impact of public debt on economic growth, there is a large body of empirical work that supports a negative impact between these two variables. These studies include Gómez-Puig and Sosvilla-Rivero (2015; 2017), Ahlborn and Schweickert (2016), Panizza and Presbitero (2013), Szabo (2013), Égert (2012), Afonso and Jalles (2011), Cochrane (2011a, 2011b), Kumar and Woo (2010), the International Monetary Fund (2005), and Clements, Bhattacharya, and Nguyen (2003).…”

“…Ahlborn and Schweickert (2016), while testing the relationship between public debt and GDP growth using a sample of 111 OECD and developing countries for eight 5-year periods from 1970 to 2010, concluded that the link between public debt and GDP growth varies considerably across countries due to the degree of fiscal uncertainty brought about by each economic system. After employing varying methodologies, which include time-fixed effects, random effects pooled ordinary least squares (OLS), and two-stage least squares, the empirical findings of Ahlborn and Schweickert (2016) suggest that public debt has a strong negative impact on GDP growth in continental countries than in liberal countries.…”

Does public debt disrupt economic growth in Nigeria? A two-stage least squares approach

“…While a considerable body of past investigation on the subject proposes a negative connection between public debt and economic growth (Abbas & Christensen, 2010;Ahlborn & Schweickert, 2016;Akram, 2015Akram, , 2016Al Kharusi & Ada, 2018;Clements, Bhattacharya, & Nguyen, 2003;Egert, 2015;Gomez-Puig & Sosvilla-Rivero, 2018;Hansen, 2002;Huang, Panizza, & Varghese, 2018;Kumar & Woo, 2010;Mhlaba & Phiri, 2019;Panizza & Presbitero, 2014;Reinhart & Rogoff, 2010a;Reinhart & Rogoff, 2010b;Sachs, 1989;Schclarek, 2004;Serieux & Yiagadeesen, 2001;Szabo, 2013;Weeks, 2000;Woo & Kumar, 2015), two conflicting viewpoints still subsist.…”

The impact of public debt on economic growth in Côte d'Ivoire: New evidence from linear and non-linear ARDL approaches

“…The empirical literature on the symmetric impact of public debt on economic growth is extensive and has been rising over time. The findings vary depending on the estimation modelling technique utilised, model specification, and the time frame considered, among other variables (see, for example, Saungweme, Odhiambo, 2021; Gómez-Puig, Sosvilla-Rivero, 2018; Ahlborn, Schweickert, 2016). There is also an ample body of literature that support the nonlinear relationship between public debt and economic growth.…”