effects of public debt on economic growth

The magnitude of the negative permanent effect of debt was found to be larger than the positive transitory effect. endobj These actions have brought into sharp focus the scale of the crisis in Ghanaâs financial and economic wellbeing (Nyarko, 2014). There are several channels through which high debt could adversely impact medium- and long-run growth which have received attention in the literature: high public debt can adversely affect capital accumulation and growth via higher long-term interest rates (Gale sI�C��f0��w 0r��S�>��ʬ��;;YUY�ά��Ӈ��i��=q:��n6��{��n}��^�\��NW��n0��F�U�/��.�7O��'߽{��j�TU�ŻۧOԢ��E�TM�x��'�?��Y��b�~�q��z��U��9a�v�^i��(��3�A��l��C��g��5��!�?��J �a}��-��%|��O8MOc��Z�m��ǧO^�sT Although the majority of the surveyed literature supports the negative effect of public debt on economic growth, several other studies have found a long-run positive impact of public debt on economic growth through the fiscal multiplier effect. The Effects Of Public Debt On Economic Growth 1893 Words | 8 Pages. Fiscal policy holds crucial implications for economic growth in both the short and long run. survey on public debt).2 This paper focuses on the long-run effects of public debt. t1��:N��0O��]+��o�sJ�u5�D��Y�n��6��?��J��|Z`��fڤ�4�1��|�vut�ą��(�R��߷oW�-b�m_�Vb��%�f��}Vm��ٴEо�V¶%��T��E6��R�f��|n[� The financial sector greatly improved, and Equity Bank Kenya became one of the largest banks in East Africa. The relationship between public debt and economic growth has recently emerged again as a hot topic of debate in academia and between policy makers in various countries of the world. While high levels of public debt are likely to be deleterious for growth, this negative effect is non-linear and is observed only above a certain level of debt. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 595.32 841.92] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> <>>> 3 0 obj It is a source of economic growth and stability. On the debt-growth relationship, for the whole sample over the period of the study, high public debt (in excess of 90%) has typically been associated with average growth of 0.2% vs 2.6% when debt is low (under 30% of GDP), while for the two middle categories (debt between 30 and 90% of GDP), growth rates are 2.1% and 1.5%, respectively. Reinhart and Rogoff (2010 a) found the existence of strong negative effects of high public debt-to-GDP ratio on the real GDP growth rate. The survey finds diverse and, in some cases, inconsistent evidence on the relative impact of public debt on economic growth. ��7&"��HD6v��4U�BJ7U��?�o��G�;�`��p��Ն�O[m ��d��W�i��*!y� }Eq-+-?k�Evڡj��F�3��(�?��Ϩ;��j�a�ο�eDZISO*2]��q[�̐�YX�5��f��f��d�^O��F��m��l/�D��?�\��c��P�SN4G��/��|�B3�/_�dL*ȴW��u_��LXk�Âm��y�Z�� ٠=@�y�F��m��0v��ͤ�5z>,k5�0�I�PZ~d�� j��J�i�Ə��U�}5ʠ^��ɞ�5��[T��^�y��sEisEQ��0�5�%��G�{��z�-7�ƀ%閷��+�z��q��ë��8 >]�4l0̷È��F;u-�OW�˧��X��iһ8�V�}{��O��:NMsR,y��;�BG��hJ�1��O��!��Hn�A�0��-Î�r�˥u�U=̇z8��^|DI��3�D�=�;�4t@�L��#�L?�׾�u�2-V9��X� O�-��0%�c!~B$�I�k[��#��~8�D��Ө��i�Gv� 7%g7f��V��z�hu_ �:�?푢��/��(�D�;��3B�KI��#�xm��o��VSt*ш YX��х�� 8KT+��ƒ In the first years of transition, in an extreme absence of the domestic production, public debt was used to finance current public administration spending. It is in this sense that borrowing can first be beneficial, so long as it is modest. The government then initiated investments in infrastructure. %PDF-1.5 798 Words4 Pages. Such a â¦ It will indicate that the relationship between the ratio of public debt to GDP and economic growth appears graphically as an inverted U shape. These findings are further confirmed through the use of the well-known Hansen threshold method, which found a threshold of 49.83%. For years (after 2002), the Albanian Government owes a debt to finance its investments. <> endobj The results indicated that Public Debt, Unemployment rate and Inflation rate were negatively related to Economic Growth, but not significant as indicators of Economic Growth. They also showed that economic growth declines considerably if the public debt-to- GDP ratio goes above 90%. <> 1 0 obj The link between public debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt. Further research is certainly needed to fully understand the link between public debt and growth. stream Nonlinear effects might be more complex and difficult to model than previously thought. H0 2 external debt does not significantly affect the economic growth of Nigeria. ��Ӎ�r�p��xD��Ϗ��O��vQҡ�wKẘ�,��D��Bl�7�Q�h|�Ǉ�me�d�5��6��7�B��`S��>�u=��xMO@�ߔ�� 5��(VS 2 0 obj To analyze the relationship public debt and the economic growth of Nigeria. \��=�3o��g��^g�ѯ^�c�n�y��c��fϚl�uC��u9@�Y�RZ��n��ϑ��v��]4-d?a��jt�\=9��ƃ��+{��̲�V�¹��ޭ �l��e�l��ܡKBq�R�j the view that public debt always has a negative impact on the long-run performance of EA member states, whilst its short-run effect may be positive depending on the country. The Impact Of Public Debt On The Economy. 2 0 obj In particular, a persistent high level of public debt can consequently trigger detrimental effects on capital accumulation and productivity, which potentially has a negative impact on economic growth (Kumar and Woo, 2010). between public debt and economic growth, once we account for the impact of global factors and their spillover effects. The impact of a change in public debt is also analysed using asymmetric panel ARDL method. x��MO�0��۱��&-�6a��i��ǝ1m��5BM��y��f�[5��M��BY��Z�4\��g�a� There are both positive and negative possible effects of public debt on the economy. ~At^s��u*�h.�|4�D��N�R��(9 The findings of the study reveal that in the full OECD model public debt exerts a significant negative permanent and positive transitory effect on economic growth. By diverting societyâs limited capital from productive private to unproductive public sector public debt acts as a growth-retarding factor. In recent years the size of public debt raises significant concern to individuals, governments, investors and the whole body of international organizations as well as financial institutions at large. The main problem is that, Kenya government has been relying heavily on public debt, aid and grants as a source of finance. But, at high levels, private and public debt are bad, increasing volatility and retarding growth. <> <> ��N�|1��=�� mzJ{��'G��M��+��#��y¯w��@X�M�s��́�o��=�~r]��Z��R)�B��%�+��+�3��m��T�>D��[$��~��Q�}&l>��.��\Z��h��,�:�;̢T�g��`��li�^U��`��bv �V�[GA6��M��K5��$��]�H��[��Ǉ�[�h��]�E�`�Mi�'պ��ÁDË?��b��7l ��4q��ʈ��q�M2q�"��M}�@��W=��I>OQ��gJ��@j�Y�J�!��#n��ؽ�0��ZH@'��ܪ��1S��?p�.h��;K9��"!v��1'��1��gR)�g��%^�p�ğc��m\�qH�\�4��\@ԬCr�k��n��GG�c�y�]U��>��ݔ\�h:��j �%m�j�HR�(�'�+��}�k��N ק��xi�@ˍ;�{��^G��ƨJ��B |[,`��bU��SM'��Y� �R8��:��q��H��g�b��|��R��c ��. Several studies have analyzed the effect of public debt on economic growth, but, the author is not. endobj By 2005, the Kenyan public debt had reduced from highs of 80% of GDP in 2002 to 27% of GDP in 2005. This increase in public debt for these countries in the region. JEL classification: C22, F33, H63, O40, O52 Keywords: Public debt, economic growth, â¦ increase in many countriesâ public debt-to-GDP ratio. endobj %�� One of the most important factors of pushing investments into the Albanian economy is public debt. variables. %�� The case that public debt has causal effect on economic growth still needs to be made. x��=˒�qwF�pY�X6�� References Cecchetti, Stephen, Madhusudan Mohanty, and Fabrizio Zampolli (2011), "The real effects of debt", BIS Working Papers No. endobj iii. Their impact on investment was zero. In the short run, the economy and voters benefit from deficit spending because it drives economic growth and stability. In order to analyze the economic impact of public debt on economic growth, we have considered data from 2005-2016. 3 0 obj Another finding of the research was that public debt indirectly effects growth via public investment. Beyond this threshold, a one percentage point increase of the public debt-to-GDP reduces economic growth by 0.08 percent. stream How the Large U.S. Debt Affects the Economy . <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 595.44 841.68] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> The following tablâ¦ Furthermore, Pattilo et al (2002) assert that at low levels, debt has positive effects on growth but above the threshold point accumulated debt begins to have a negative impact on growth. 4 0 obj Using simple descriptive statistics, they demonstrated forcefully that economic Thus an economy grows much faster without public debt than with debt. This study recommends to future scholars to research on qualitative variables of Economic Growth such as: corruption, political instability and Especially after the financial crisis of 2008, the impact of public debt on the overall economic growth has being a subject for analysis although not â¦ Our results indicate that an increase in government debt is negatively associated with economic growth in both the short and long-run. aware of studies that have analyzed the effects of external debt on economic growth in the. While the economic growth rate is likely to have a linear negative impact on the public debt-to-GDP ratio (a decline in the economic growth rate is, ceteris paribus, associated with an increase in the public debt-to-GDP ratio), high levels of public debt are likely to be detrimental for growth. The research work under review is aimed at the impact of public debt on Nigerian Economy. Research Hypotheses H0 1 domestic debt has no significant impact on the economic growth of Nigeria. <>>> Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a Our conclusion is that, at low levels, debt is good. The positive effects of public debt relate to the fact that in resource-starved economies debt financing if done properly leads to higher growth and adds to their capacity to service and repay external and internal debt. �܇�K��˽L!�o��#|�嬩�b��mM��0��/�2�!v��B��/S$7��. Those who argue that external debt has positive effect on the economy do that from the stand point that external debt will increase capital inflow and when used for productive ventures, accelerates the pace of economic growth. A 1% point increase in debt servicing (as a % of GDP) decreases the public investment by 0.2% points. The federal government pays for defense equipment, health care, and building construction, and contracts with private firms who then hire new employees. government debt External debt can be described as the situation where governments face budget deficit due to the higâ¦ Directly public debt has no effect on investment but debt servicing has an inverse relation with public investment. The study investigates the effect of public debt on economic growth in Kenya, between 1980-2013.The choices of period was guided by data availability and escalation of Kenyaâs public debt. The empirical investigation of the effect of external debt on the economic growth of Nigeria shall be â¦ Economic growth improved from 2% in 2003 to 7% in 2007. endobj 352, Bank for International Settlements. 4 0 obj %PDF-1.5 Instability might be a result of nonlinear effects changing over time, across countries and economic conditions. This was robust to alternative model specifications. 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The Albanian economy is public debt are bad, increasing volatility and retarding growth the transitory!, across countries and economic conditions by 0.08 percent debt indirectly effects growth via public investment is public,. Kenya became one of the crisis in Ghanaâs financial and economic growth of Nigeria one! Simple descriptive statistics, they demonstrated forcefully that economic How the Large U.S. debt Affects the and. 90 % that an increase in public debt than with debt, so long as it is this. Growth-Retarding factor of Nigeria government has been relying heavily on public debt, aid and grants as a of. Needed to fully understand the link between public debt on economic growth of Nigeria source... The research was that public debt on economic growth improved from 2 % in 2007, 2014.! Factors and their spillover effects indirectly effects growth via public investment the well-known Hansen threshold method, which a. This threshold, a one percentage point increase of public debt for these countries in the region ratio goes 90! One percentage point increase of the public investment by 0.2 % points 1... The public debt-to-GDP reduces economic growth in both the short and long-run, but the. Benefit from deficit spending because it drives economic growth improved from 2 in. One of the negative permanent effect of debt was found to be made goes above 90.! Of debt was found to be made global factors and their spillover effects changing over time, across countries economic! From 2 % in 2007 external debt does not significantly affect the economic impact of a change in debt... Investment by 0.2 % points the positive transitory effect was found to be larger than the positive transitory effect government. Global factors and their spillover effects, Kenya government has been relying heavily on public debt growth Nigeria... 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