According to umaru, hamidu, and musa 20 external debt possess a negative impact on economic growth while domestic debt has a positive impact on economic growth gdp. It becomes a tax on domestic production such that the amount spent hampers meaningful economic growth activities as it reduces resources available to government to implement growth oriented economic policies. The study set out to test for both a long run and causal relationship between external debt and economic growth in nigeria. This in focus summarizes federal budget and borrowing outcomes and trends for federal spending and revenues. If there is no difference in growth rates when nations debt rises from 0% to 31% to 61% of gdp it seems odd to see an effect kickin when this debt to gdp ratio rises from 89% to 91%. Government debt and economic growth decomposing the cause. The federal debt is the money that the government owes to its creditors, which include private citizens, institutions, foreign governments, and other parts of the federal government.
Real effects of government debt on sustainable economic. In the light of the above, this study on ghanas government debt and its impact on the economic. The real effects of debt bank for international settlements. Government consumption, government debt and economic growth. Our data allow us to look at the impact of household, nonfinancial corporate and government debt separately. Jacobo and ileana r jalile1 abstract this paper investigates the impact of government debt on gdp in 16 latin american economies, namely. Spending, revenue, and economic growth the constitution provides congress with the authority to manage the federal budget through its power of the purse. Pdf the impact of government debt on economic growth. Federal debt is constrained by the willingness of investors to finance borrowing.
Moderate levels of debt are found to have a positive shortrun impact on economic growth through a range of. Large government budget deficits may be warranted at times when the economy is in a downturn, like during the great recession that began in 2008, in order to stimulate spending and mitigate economic weakness. Pdf the impact of government debt on the economic growth. We also consider debt togdp ratio interactions with monetary, public finance, institutional and macroeconomic variables. Pdf the role of government debt in economic growth. Public debt and economic growth in advanced economies. In 1988, the debt was only half of americas economic output.
The study is intended to address estimation of the impact of the government debt on economic growth. We study the effect of public debt on economic growth for annual and 5year average growth rates, as well as the existence of nonlinearity effects of debt on growth for 14 european countries from. The relationship between debt and economic growth economic. The study adopted debt overhang hypothesis, the crowding out effect neoclassicalists theory and endogenous growth theory for the study objectives. The empirical literature on the relationship between government debt and economic growth is scarce, but gaining importance. The literature is replete with empirical models that estimate the effect of external debt of developing countries on. The impact of high government debt on economic growth and its. Evidence from the malaysian economy siti nurazira mohd daud the results demonstrate that there is a longrun relationship between federal government debt and economic growth in malaysia. The theoretical literature tends to point to a negative link between the public debt togdp ratio and the steadystate growth rate of gdp per capita see, for instance, saintpaul, 1992, aizenman et al. To the best of our knowledge, only a few and inconclusive studies focus on external debt for malaysias economic growth.
The impact of government debt on the economic growth of ghana. A large panel data of countries for 19702010 reveal a negative and robust effect of public debt on growth. A reasonable expenditure plan in this case, consumption expenditure can control the impact of public debt on economic growth. Government debt and economic growth economic policy. Government consumption, government debt and economic growth shahrzad ghourchiany hakan yilmazkudayz february 21, 2020 abstract this paper compares the e. Since the great recession, the topic of financial debt has gained renewed attention. We study the effect of public debt on economic growth for annual and 5year average growth rates, as well as the existence of nonlinearity effects of debt on growth for 14 european countries from 1970 until 2012. The results show there are positive significant long and shortrun relationships between government debt and sustainable economic growth.
And rising debt and higher interest rates drive up the federal governments net interest costs. Pdf the impact of government debt on the economic growth of. According to this view, the issuance of government debt stimulates aggregate demand and economic growth in the short run but crowds out capital and reduces national income in the long run. The aim of the study was to investigate the impact of external debt on economic growth. The study examines the peculiarities of the impact of public debt on the economic growth of states. An empirical analysis of east african countries halima ibrahim x506723420 a research paper submitted in partial fulfilment of the requirements for the award. Rising public debt to gdp can harm economic growth by alexander chudik, kamiar mohaddes, m. More particularly, public debt has a positive impact on economic. An empirical investigation was conducted using time series data on real gross domestic product, external debt stock, external debt payments and exchange rate from 19802012.
In the presence of wage rigidities and unemployment, instead, public debt has no effect on the allocation of resources and can even have a posi tive effect if it is used to finance productive investment. Government debt and economic growth economic policy institute. Apr 11, 2020 the national debt is greater than what america produces in a whole year. We call this view conventional because it is held by most economists and almost all policymakers. The aim of the study was to analyze and identify the determinants of the impact of government. Apr 25, 20 does high debt cause poor economic growth or does poor economic growth lead to higher debt. The imf fiscal affairs department recently compiled a comprehensive database on gross government debt to gdp ratios covering nearly the entire imf membership back to 1875. This high debttogross domestic product ratio tells investors that the country might have problems repaying the loans. In addition, our findings are of great interest since there is evidence of a nonlinear relationship. In this regard, the gitd findings are clearly out of step with academic research on government borrowing and economic growth. Government budget deficits and economic growth econofact. To assess the impact of government debt on economic growth for 9 latin american countries over a period of 12 years 19741986, geiger 1990 used the lag distributional model and found a statistically.
From a policy perspective, a negative impact of public debt on economic growth strengthens the arguments for ambitious debt reduction through fiscal consolidation. The growth prospects of a nation are stymied by the burden of government debt. The research is based on data obtained from 1980 to 2007 on external debt, private investment, foreign direct investment fdi, gross domestic product gdp and. The objective of this study was to establish the relationship between public debt and economic growth in afghanistan. To get a sense of the relevance of the gitd findings for the united states. The literature is replete with empirical models that estimate the effect of external debt of developing countries on economic growth. There is no compelling theoretical reason why the stock of debt at a given point in time should harm contemporaneous economic growth. There are no signs that federal borrowing capacity will be exhausted in the short term. Contribution originality our paper aims at contributing to the debate on the relationship between public debt and economic growth. Thus, if such a threshold exists, it is much more likely to be driven by a causal effect of debt on growth. Debt overhang phenomenon is where substantial resources are used for debt servicing such that it stifles economic growth. However, the issue of public debt and economic growth is not verymuch focused in the context of bangladesh.
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