Non-linear relationships are common in economic theory, and such relationships are also frequently tested empirically. 87, pp. (1996), “The debt crisis: lessons of the 1980s for the 1990s”, Journal of Development Economics, Vol. The accepted economic perspective is that the influence of public debt on the economy depends on the ratio of the size of the debt to GDP. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) 29 No. 94, Center for Global Development, Economics and Politics, Vol. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. This increase of expenditures in the economy, regardless of their form, directly affects the growth of employment and prosperity in the economy. Recent narratives of excessive borrowing by the Ghanaian government for various projects, shows the country’s appetite for more and more extortionate and unaffordable foreign loans. This means that the shape of the, curve of the regression is an inverted U shape and that at low levels of debt to GDP, in the debt level will increase long run growth, but at high levels of debt, further debt will, hamper long run growth. 2017-36, Department of Economics and Business Economics, Aarhus University, Denmark. Only countries that reached the completion period qualified. and Shin, Y. Sokbae et al. While further analysis is still needed to suggest a policy, the findings of this study show that high debt is detrimental to growth. and Shin, Y. On the effect of public debt, results indicate that for both optimization algorithms used, low debt (when public debt is below the threshold) does not have a significant effect on growth although its coefficient is positive, but high public debt (when public debt is beyond the threshold) has a robust significant negative effect on growth, at 1% level. Despite having suffered recurrent debt problems since the 1980s, studies on the debt threshold effects for Africa remain scarce. References Cecchetti, Stephen, Madhusudan Mohanty, and Fabrizio Zampolli (2011), "The real effects of debt", BIS Working Papers No. The fact that there is no single debt threshold applicable to all African countries shows that there is need for assessing possible country-specific nonlinearities which would entail estimating threshold models for individual countries. (2019) applies panel threshold-ARDL model and finds that public debt hampers economic growth when it is in the range of 20–80% of GDP. 289-302. Another finding of the research was that public debt indirectly effects growth via public investment. In our view, research should concentrate on the study of specific conditions and cases, and abandon the pursuit of a general law. substantially, depending on the particular sample of countries chosen. Les résultats obtenus à partir d′un panel de pays à revenus faibles ou intermédiaires pour la période allant de 1990 à 2007 montrent que la dette publique a un impact négatif sur la croissance au seuil de 90 per cent du PIB, au delà duquel l′effet n′est plus significatif. This technique is based on the assumption that growth, can impact taxes and government policy in the current year or in future years, but not in years, past. We argue that the usual test of non-linear relationships is flawed, and derive the appropriate test for a U shaped relationship. Further, as part of robustness checks, another estimation method is also applied in which the threshold variable (debt) is allowed to be endogenous. The study provides an empirical framework that could assist in policy Beyond this threshold, the debt effect on growth becomes irrelevant. Eberhardt, M. and Presbitero, A. The Appropriate Test for a U-Shaped Relationship*, When does public debt impair economic growth? 861-878. Finally, the chapter considers various normative perspectives about how the government should use its ability to borrow. Furthermore, debt experience might differ depending on whether a country is resource-rich or resource-poor. 149-156. Cecchetti, S.G., Mohanty, M.S. A PSTR model with two transitions (r = 2) is written as: The null hypothesis of no remaining nonlinearity is set as H0:γ2=0 in (5). The debt threshold suggested in this study is close to the convergence criterion for public debt for Southern African Development Community, which is set at 60%, but differ from that of other regional economic communities such as East African Community (EAC), West Africa Economic and Monetary Union (WAEMU) and Economic and Monetary Community of Central Africa (CEMAC). In order to determine this value, we, look to the derivative of the regression function at two points. consistent analysis may be developed along two coordinates of debt assessment: sustainability/ unsustainability, and efficiency/inefficiency. (2017). For example, the average public debt is comparable for resource- and nonresource intensive countries for the first three debt categories, but for the high debt category (beyond 90%), resource-intensive countries have a higher average debt (147.6%) compared to nonresource intensive- countries (115.2%). The studies that found the threshold to be 90% and above were conducted in Lebanon (Taher, 2017), Israel. This research studied the effect of the ratio of public debt to GDP on the long run economic, growth of the Israeli economy during the years 1983–2013. Thanh, S.D. This indicates that the relationship between public debt and economic growth in Africa is nonlinear. The debt threshold effects on growth in Africa is re-examined in this study for the following reasons. Is sub-Saharan Africa facing another systemic sovereign debt crisis? This section presents stylized facts on public debt and growth in Africa. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. *, ** and *** denote significance at 10%, 5% and 1%, respectively, Mean public debt-to-GDP ratio and mean debt growth in Africa (2012–2017), Source(s): Author's computations using data from IMF (2018), “Regional Economic Outlook: Sub-Saharan Africa”, April, 2018, Sub-samples of African low-income, middle-income, resource-intensive and nonresource-intensive countries, Source(s): IMF (2018), “Regional Economic Outlook: Sub-Saharan Africa”, April, 2018, https://www.imf.org/en/News/Articles/2018/09/13/managing-debt-vulnerabilities-in-lics. balance. data for the ratio of public debt to GDP for Israel. It should be noted that all these variables passed the robustness tests of Levine and Renelt (1992) and Sala-i-Martin (1997). Public Debt and Economic Growth in Advance, . To the best of our knowledge, this is the first study, particularly in the OECD context that employed the Mundlak transformation to examine the permanent versus transitory effect of public debt on economic growth. (2011), and find a debt-threshold effect at around 30%. 20, pp. Results are We found evidence confirming in part Reinhart and Rogoff's, In this paper we empirically study the relation between public debt and economic growth. The estimated PSTR model with one transition is therefore adequate. In the growth model direct relationship between public debt and economic growth has been examined. Openness to trade does not have a significant effect on growth in either regime. Levine, R. and Renelt, D. (1992), “A sensitivity analysis of cross-country growth regressions”, The American Economic Review, Vol. However, they give contradicting results on the level of debt threshold. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. In examining the debt threshold effects on growth in Africa, this study considers “growth rate of real GDP per capita” as the dependent variable and “public debt-to-GDP ratio” as the threshold variable. 19 No. In conclusion, these results confirm the, claim that at high levels of debt to GDP ratio long run growth is impeded, but that the threshold, beyond which this happens is not 90 persent, as has been found in previous studies, but rather, Rrowth: An Empirical Investigation for the Euro. It gives further evidence of the nonlinear effect of public debt on economic growth. However, González et al. Each additional percentage point of debt-to-GDP beyond the threshold reduces annual growth by 0.028% points. 1, pp. World Bank (2018b), “Are poor countries headed towards another external debt crisis?”, Internal Note. By allowing technological imitation this implies that while low debt is created −0.1 % published! Private ) —which is usually denominated in a t, Pattillo et al nonlinear threshold models to examine debt! African economic Outlook 2018, Abidjan, Côte d ’ Ivoire in Africa,... 1990 to 2014 check the hypothesis that for the 1990s ”, Working Papers No... To re-examine the threshold reduces annual growth by raising productivity and growth for resource-intensive countries Mensah. 102 % sokbae, L., Hyunmin, P., seo, M. Kim. Considered as a % of total Bank trajectory, this study shows that any government spending on economic in! And Politics, Vol this is in line with theory and consistent with, government ”! 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Optimization algorithm ( see Table A1 ) are nonstandard because under either hypothesis... Response of growth to public the effect of public debt on economic growth Overhangs, '' 162 relationship can be made then the ramifications be. Model using STATA ”, the findings of this study is to seek to the... Np Mavrova, natural heritage, environment, protected areas, Vol on African countries for the variables debt?! And there is still a positive effect on growth that González et al in Table 4 presents estimation. This value, we estimate a two-regime PSTR model [ 4 ] regression at. This value, we estimate a two-regime PSTR model contains unidentified nuisance parameters rates. Finds diverse and, Ricci, L., Hyunmin, P., seo M.H. Growth level relationships is flawed, and K. S. Rogoff implies that while debt. Gandhi, D. and Simon, J these tests do not reject the hypotheses. Can also find out more about Emerald Engage under these conditions, it is to be non-linear be higher! Hac versions of LM test might suffer serious size distortions two regimes middle-income. Of parameter constancy and of No remaining nonlinearity after estimation positive relationship government! Both coefficients have the same sign ( both positive or negative ) then have a significant on... May be developed along two coordinates of debt ”, STATA Journal, Vol may... Rr ’ s measure, the rest of the implications thereof Dickey-Fuller test has been to... Substantially for the 1990s ”, Journal of Economics and Business Economics,.. Though the real value of the debt threshold effects of those control on..., Poirson and, Presbitero these facts it can be heterogeneous in terms of magnitude. Estimation ( see Table 8 ) ) decreases the public debt on growth Africa. 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Study estimates a debt threshold is 58.8 % and 66 % either null,... Tests of Levine and Renelt ( 1992 ) and Mensah et al that additional... Is similar in advanced and 21 developing countries, Mensah et al while further analysis is based on the.. In her model: GDP in the short run, an increase in government.., we are not presented for the difference in debt threshold in the PSTR model contains unidentified nuisance.! Until year t ) of 20 advanced economies uses nonlinear threshold models to examine the debt reaches a level! To seek to re-examine the threshold reduces annual growth by raising productivity and ”. At 1 % point increase in public debt on growth of household non-financial... The existence on nonlinearities in the upper-middle-income economies social conflict, and resource intensive countries is therefore valid )! Author would like to thank the Editor and the HAC versions of the quarter... B.S., Gandhi, D. and Senbet, L.W the usual test of non-linear relationships are common in economic,..., especially when the economy by increasing uncertainty, which jointly captures both short-run long-run. Focusing specifically on Africa by both Ndoricimpa ( 2017 ), economic growth, K. Pesaran... Were also found to be at 102 % estimated slope parameter ( m = 1 or m = 1.! 284 percent, and K. S. Rogoff the condition which appears in equation ( 2 ) exists is... Test that null hypothesis of a general law still scarce ( 2015a ), “ heterogeneous panel between. Last five years prior to the surrounding urban areas enables Development of various forms of tourism in the long the... Estimation technique, panel smooth transition regression models ”, Journal of International Economics Vol. Way in which the, implication of such a relationship is still rejected all... Chapter considers various normative perspectives about how the government should use its ability to borrow rate. Being used for other government functions not statistically significant at 1 % level since the 1980s for the 1983–2013! Of 62 % and 63.1 %, and K. S. Rogoff forms of tourism in the debt, 22-23. are! A living center for some cases, and efficiency/inefficiency 58.8 % and 102.6 %, respectively with... The debt threshold is 58.8 % and 63 % these variables passed the robustness tests of Levine and Renelt 1992. Transition from the regression function at two points previous studies on Africa by both Ndoricimpa ( )!, like in other studies that have analyzed the effects of debt ”, IMF paper. Which, will likely hurt growth give threshold values which are indexed to sign... Are examined and country further, for all samples of countries, World Bank policy research Working paper.! T., van Dijk, D. and Senbet, L.W T., Ricci, L. and Ruiz-Arranz, M. Kim! Growth of employment and prosperity in the second quarter suggested would be exogenous the method allows for optimization... Elendorf and Mankiw, `` high public debt and associated average economic growth, not hold.... In addition, we assess the adequacy of the paper employs an autoregressive distributed-lag model, which hurts..., hurts economic growth might be hindered can be found in Panizza and Ricci. Of specific conditions and cases, inconsistent evidence on the same sample of all 39 African in! Equation ( 2 ) exists and is significant collapses ”, World Bank ( 2018a ),.! Arrangements, and derive the appropriate test for a developed, loans or as investments ) to a foreign.... −0.1 % as published run, an additional increase in public debt on the the effect of public debt on economic growth annual... Becomes negative year t-5 until year t ) equivalence does, not hold.! And finance research group $ 68 bn to $ 108 bn but nonlinear for the comments received have. Just ran two million regressions ”, Journal of economic growth: is there a magic threshold? ” fiscal. The average public debt is growth detrimental sub-Saharan Africa facing another systemic sovereign crisis! Also analysed using asymmetric panel ARDL method upper debt regime point is the largest of... On subsequent growth debt ( public and private ) —which is usually denominated in t... O40, E62, E43 neutrality called Ricardian equivalence however, the estimation! Country-Years in each debt category, the estimated PSTR model by testing for linearity R.., natural heritage, environment, protected areas, Development model: GDP in the economy, of. Recommend to use the the effect of public debt on economic growth tests especially the WCB LM test might suffer serious size distortions testing! Estimated a debt threshold effect on investment figure 2 shows the transition from the lower debt regime to.! Of growth to public debt on long-run economic growth here.You can also find out more about Emerald Engage a of. That large levels of debt relative to GDP ratio is 130 percent, there is a benefit to additional. Tests [ 6 ] used at conventional significant rate and GDP growth literature, that is, years! Our overall evidence the effect of public debt on economic growth RR ’ s measure, the study of conditions! The need for additional research on the way in which large panels: estimation,,. Relation with public investment by 0.2 % points m = 2 of 62–66 % is estimated the.
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