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Public debt and economic growth : a Granger causality panel data approach

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This paper analyses the Granger-causality relationship between the growth of the real GDP per capita and the public debt, here represented by the ratio of the current primary surplus/GDP and the ratio of the gross Government debt/GDP. Using OECD annual data for 20 countries between 1988 and 2001, we adapt the methodology recently applied by Erdil and Yetkiner (2008) and we conclude that there is clear Granger causality and that it is always bi-directional. In addition, our findings point to a heterogeneous behaviour across the different countries. These results have important policy implications since not only does public debt restrain economic growth, but also real GDP per capita growth influences the evolution of public debt.
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... Moreover, the majority of empirical research on this topic aims to determine the most effective level of debt/GDP ratio, without a well-defined theoretical model that demonstrates the connections between government debt levels and growth dynamics Rogoff, (2009 and2010); Panizza and Presbitero, (2012); Kumar and Woo, (2010); Checherita and Rother, (2010), and Ferreira, (2009). Although the Reinhart and Rogoff scenario has faced criticisms and its investigation revealed inaccuracies, the significant boundary of 90% seems to be essential as it addresses a deficiency in the existing body of literature on the topic. ...
... Finally, when we record a reduction in debt from 200% to 100% of exports, a gain of around 1 point in growth per capita is noted. Ferreira (2009), for 20 OECD countries over the period 1988-2001, and by applying Granger causality tests, shows that increasing debt rates have negative effects on growth. The negative effect is statistically significant and occurs in both directions: high government debt reduces economic growth, and low growth worsens the debt. ...
... The empirical literature on this topic not only presents ambiguous results but focuses mainly on the possible impact of high debt levels on economic growth, ignoring the possibility of reverse causality from growth to debt, with rare exceptions such as the works of M. Ferreira and M. Puente. 22 However, A. Bell et al. find that there is some theoretical evidence that public debt is likely to accumulate when growth is low. 23 In this regard, since low growth means more limited government revenues, governments may be forced to increase their debt levels to maintain the welfare state, stimulate demand in the short run, and increase growth in the long run, according to M. Feldstein. ...
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... Niektórzy autorzy, tacy jak Modigliani, Diamond i Saint-Paul wskazują, że zwiększenie długu publicznego zawsze przyczynia się do spadku tempa wzrostu gospodarczego. Z kolei, Patillo, Romer i Weil stwierdzili, że niski poziom długu publicznego wpływa dodatnio na wzrost gospodarczy, zaś wysokie rozmiary zadłużenia oddziaływują negatywnie na tempo wzrostu gospodarczego kraju 4 . ...
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Podstawowym celem artykułu jest analiza związków między długiem publicznym i wzrostem gospodarczym w Unii Europejskiej w okresie 2000-2010. Artykuł składa się z dwóch części. Pierwsza cześć dotyczy analizy teoretycznej dotyczącej współzależności między długiem publicznym i wzrostem gospodarczym z uwzględnieniem przyczyn i czynników determinujących te zależności. W następnej części artykułu zbadano związek między długiem publicznym i wzrostem gospodarczym w UE przy pomocy modelu wektorowej autoregresji (VAR). Dokonano oszacowania współczynników elastyczności długu publicznego na zmiany PKB oraz współczynników elastyczności PKB na zmiany długu publicznego na podstawie funkcji odpowiedzi impulsowych. Następnie przeprowadzono dekompozycję wariancji długu publicznego i PKB w celu oszacowania wpływu tych czynników na zmienność odpowiednio PKB i długu publicznego.
... Crowding-out effect is occasioned by an increase in interest rate owing to accumulation of public debt. Rising interest rate leads to a decrease in investment and ultimately lower economic growth (Abubakar & Mamman, 2020;Ferreira, 2009). ...
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This paper sought to establish the relationship between public debt and economic growth in Kenya over the period 1970-2019. Secondary data on domestic debt, external debt and GDP growth was obtained from the Central Bank of Kenya and the World Bank. The data collected was analyzed using both descriptive and inferential statistical procedures. The findings indicate that external debt has significant negative impact on economic growth in the long run with no noticeable effects in the short run. On the other hand, domestic debt was found to have significant negative effect on growth in the short run, and no significant impact on growth in the long run.
... They further concluded that quality and quantity of investment in economies with strong policies and institutions adversely reacts to indebtedness. Ferreira (2009), ul Mustafa, Abro, Hussain, & Ali, (2021, Ahmed, Issani, Mahar, & ul Mustafa, (2020) study the relationship between public debt and economic growth by using the granger causality method. The empirical results exhibit that the evidence of granger causality is prominent between the growth of the real GDP per capita and public debt. ...
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The reliance on debt is not only essential but also a key factor in economic growth of poor countries like Pakistan because of a meager tax base and an annuity of fiscal deficit. Trade surplus is a common tool that covers the budget deficit but twin deficit makes the economic conditions worst. The excessive borrowing can stimulate the economic cycle in the short run but in the in the long-run it creates the issues of debt-overhang. This timely study is an attempt to investigate the short-run and long-run dynamics of debt on the economy of Pakistan. The empirical results (ARDL co-integration) suggests that long-run relationships exist among the variables under consideration such as Exports and Remittances have negative effects on debt, while other variables have positive effects. The Error-Correction-Model (ECM) analysis indicates mean-reverting behavior, where the dependent variable returns to its long-run equilibrium. Post-estimation tests support the model's assumptions. The Jarque-Bera test shows that residuals exhibit normal distribution. CUSUM and CUSUMsq tests indicate reliability and stability of the regression model. There is a long-run relationship between exports of goods and services (EGS), imports of goods and services (IGS), gross fixed capital formation (GFCF), net official development assistance (NOD), personal remittances (PRR), and debt in Pakistan. In the long-run, Exports of goods and services have a negative impact, Imports of goods and services have a significantly positive impact, Gross fixed capital formation has a positive impact, Net official development assistance has a positive impact, Personal remittances have a negative impact on debt respectively. However, Trade as a percentage of GDP has an insignificant impact on debt in the long run. The study also found that the impact of each variable on Debt is different in the short run. Overall, the study provides valuable insights into the factors that affect Debt in Pakistan.
... They further concluded that quality and quantity of investment in economies with strong policies and institutions adversely reacts to indebtedness. Ferreira (2009), ul Mustafa, Abro, Hussain, & Ali, (2021, Ahmed, Issani, Mahar, & ul Mustafa, (2020) study the relationship between public debt and economic growth by using the granger causality method. The empirical results exhibit that the evidence of granger causality is prominent between the growth of the real GDP per capita and public debt. ...
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Full-text available
The reliance on debt is not only essential but also a key factor in economic growth of poor countries like Pakistan because of a meager tax base and an annuity of fiscal deficit. Trade surplus is a common tool that covers the budget deficit but twin deficit makes the economic conditions worst. The excessive borrowing can stimulate the economic cycle in the short run but in the in the long-run it creates the issues of debt-overhang. This timely study is an attempt to investigate the short-run and long-run dynamics of debt on the economy of Pakistan. The empirical results (ARDL co-integration) suggests that long-run relationships exist among the variables under consideration such as Exports and Remittances have negative effects on debt, while other variables have positive effects. The Error-Correction-Model (ECM) analysis indicates mean-reverting behavior, where the dependent variable returns to its long-run equilibrium. Post-estimation tests support the model's assumptions. The Jarque–Bera test shows that residuals exhibit normal distribution. CUSUM and CUSUMsq tests indicate reliability and stability of the regression model. There is a long-run relationship between exports of goods and services (EGS), imports of goods and services (IGS), gross fixed capital formation (GFCF), net official development assistance (NOD), personal remittances (PRR), and debt in Pakistan. In the long-run, Exports of goods and services have a negative impact, Imports of goods and services have a significantly positive impact, Gross fixed capital formation has a positive impact, Net official development assistance has a positive impact, Personal remittances have a negative impact on debt respectively. However, Trade as a percentage of GDP has an insignificant impact on debt in the long run. The study also found that the impact of each variable on Debt is different in the short run. Overall, the study provides valuable insights into the factors that affect Debt in Pakistan.
... Panizza and Presbitero (2013) shed light on the complexity of this relationship. Empirical assessments have revealed various scenarios, ranging from no causality to both unidirectional and bidirectional causality (Ferreira 2009;Gómez-Puig and Sosvilla-Rivero 2015;Panizza and Presbitero 2014). Additionally, research suggests the potential for a nonlinear relationship, wherein the dynamics alter beyond a certain threshold (Alexander et al. 2017;Baum, Checherita-Westphal, and Rother 2013;Checherita-Westphal and Rother 2012;Égert 2015;Markus and Presbitero 2015;Pattillo, Poirson, and Antonio Ricci 2011). ...
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