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Volume 5 • Issue 2 | July 2021

Public debt and economic growth: contemporary evidence from a developing economy

Sam Kris Hilton

01/11/2021 105 0 0
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GDP Public debt Government consumption expenditure Investment spending Inflation rate Population growth rate

Abstract:

Purpose
Considering the continuous rise in the public debt stock of developing countries (particularly Ghana) with the unstable economic growth rate for the past decades and the recent borrowing because of the impact of COVID 19, this paper aims to examine the causal relationships between public debt and economic growth over time.

Design/methodology/approach
The paper uses a dynamic multivariate autoregressive-distributed lag (ARDL)-based Granger-causality model to test the causal relationships between public debt and economic growth [gross domestic product (GDP)]. Annual time-series data that spanned 1978–2018 were sourced from the World Bank Development Indicator database and the IMF fiscal Affairs Department Database and WEO.

Findings
The results reveal that public debt has no causal relationship with GDP in the short-run but there is unidirectional Granger causality running from public debt to GDP in the long run. Again, investment spending has a negative bi-directional causal relationship with GDP in the short-run but they have a positive bi-directional causal relationship in the long run. Conversely, no short-run causal relationship exists between government consumption expenditure and GDP but long-run Granger causality runs from government consumption expenditure to GDP. Finally, public debt has a positive impact on the inflation rate in the short run.

Practical implications
The findings imply that government(s) must ensure high fiscal discipline to serve as a precursor for the effective and efficient use of recent borrowing, that is, the loans should be used for highly prioritized projects (preferably investment spending) that are well evaluated and self-sustained to add positively to the GDP.

Originality/value
This paper provides contemporary findings to augment extant literature on public debt and economic growth by using variables and empirical models, which prior studies could not sufficiently cover in a developing country perspective and affirms that public debt contributes to GDP only in the long run.

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Further reading

  1. Checherita-Westphal, C. and Rother, P. (2012), “The impact of high government debt on economic growth and its channels: an empirical investigation for the euro area”, European Economic Review, Vol. 56 No. 7, pp. 1392-1405.
  2. Egert, B. (2015), “Public debt, economic growth and nonlinear effects: myth or reality?”, Journal of Macroeconomics, Vol. 43, pp. 226-238.
  3. Engle, R.F. and Granger, C.J. (1987), “Cointegration and error-correction - representation, estimation and testing”, Econometrica, Vol. 55 No. 2, pp. 251-278.
  4. Mencinger, J., Aristornik, A. and Verbic, M. (2014), “The impact of growing public debt on economic growth in the European union”, Amfiteatru Economics, Vol. 16 No. 35, pp. 403-414.

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