The Asymmetric Link between Public Debt and Private Investment in Malaysia

Abstract

This paper intends to examine the existence of asymmetric effect of public debt on private investment in Malaysia. As Malaysia's public debt has been rising in recent years the question has been raised on whether the persistently high debt level can negatively affect private investment or otherwise. This study, which uses non-linear autoregressive distributed lags (NARDL) estimation with data from 1980 to 2016, shows some evidence of asymmetrical effect in private investment-public debt nexus in both the long-and short-run. There are evidences of long-run asymmetry between private investment and total public debt, external debt, and federal government debt. In the short run, asymmetric relationship exists between private investment and domestic debt, external debt, and federal government debt. The findings also conclude that, in both long-run and short-run, higher public debt crowds out private investment, which is in line with the crowding-out effect hypothesis. Hence, policy-makers are advised to maintain public debt at a healthy level to ensure private investment is not being crowded-out.

A Note on Public Debt-Private Investment Nexus in Emerging Economies

“…who failed to accept the hypothesis of an inverted U-shaped relationship between public debt and economic growth in the developing economies. However, our results are consistent with the findings by Lau et al (2019), and Mabula and Mutasa (2019), who report similar results for Malaysia and Tanzania, respectively. 7…”

“…In summary, we establish evidence for a nonlinear relationship between public debt and private investment for the emerging market economies, thereby lending credence to the findings by Lau et al (2019) and Mabula and Mutasa (2019), who report similar results for Malaysia and Tanzania, respectively. However, our finding is in contrast with that of Law et al (2021), who failed to accept the hypothesis of nonlinear relationship between the two variables, in the sample of developing economies they considered.…”

“…The new thinking in the debt sustainability analysis is the possibility of nonlinearity between public debt and private investment, whereby the former can either stimulate or undermine the latter depending on the threshold level of public debt (see Chang and Chiang, 2011;Lau et al, 2019;Mabula and Mutasa 2019;Caner et al, 2021;Kassouri et al, 2021;Law et al, 2021). However, there is no study, to the best of our knowledge, that offers a broader perspective to the subject matter whereby the nexus is conducted distinctly for a group of emerging economies as well as the developed economies and whereby a threshold level of debt is simultaneously determined.…”

Kamu borçlarının, özel ve kamu kesimi yatırımlarını dışlama etkisi: Türkiye için ampirik bir analiz

“…When the theoretical and empirical literature on the subject is examined, it is seen that there is no definite judgment about the crowding-out and crowding-in effects. Some studies in the literature that have been found to cause the crowding out effect of public debt on private sector investments are as follows; Çaşkurlu (2020), Akram (2011), Lau et al (2019), Tülümce and Buyrukoğlu (2013), Altunöz (2013). Studies investigating the effect of public debt on public investments and found to cause the crowding out effect of empirical findings are as follows; Picarelli et al (2019), Heinemann (2006), Ncanywa-Masoga (2018), and Durkaya et al (2010).…”

The impact of debt service costs and public debt on private capital formation in South Africa

“…In addition, increasing private debt increases the demand for loans and raises the real interest rate, which discourages private investment. Traditionally, the interest rate channel is the main channel through which public debt impact capital formation (Lau et al, 2019). Increased public debt is expected to raise interest rates and distort allocation of capital in financial markets resulting in lower private capital formation in the crowding out channel.…”