Skip to main content

Debt and Growth: Decomposing the Cause and Effect Relationship

This study provides a data‐rich analysis of the dynamics of government debt and economic growth for a longer period (1960–2009). It spans across different debt regimes and involves a worldwide sample of countries that is more representative than that of studies confined to advanced countries. This study observes a negative relationship between government debt and growth. The point estimates of the range of econometric specifications suggest that a 10‐percentage point increase in the debt‐to‐gross domestic product ratio is associated with 23 basis point reduction in average growth. The results establish the nonlinear relationship between debt and growth. Further, by employing panel vector autoregressions approach, this study decomposes the cause and effect relationship between debt and growth and offers an answer to the question—Does high debt lead to low growth or low growth leads to high debt? The results derived from the impulse–response functions and variance decomposition show the evidence of the long‐term effect of debt on economic growth. The results indicate that the effect is not uniform for all countries but depends mostly on the debt regimes and other important macroeconomic variables like inflation, trade openness, general government final consumption expenditure, and foreign direct investment.

Swamy, Vighneswara (2020).  Debt and growth: Decomposing the cause and effect relationship, International Journal of Finance and Economics, Vol. 25, No. 2, pp. 141-156.  April.   https://doi.org/10.1002/ijfe.1729    John Wiley & Sons. Listed in ABDC – B and Scopus.

Comments

Post a Comment

Popular posts from this blog

My Quick Take on the RBI Monetary Policy Announcement

  My Quick Take on the RBI Monetary Policy Announcement Overall, I believe the RBI's decision to maintain the repo rate at 6.5% and raise the GDP growth forecast for FY23-24 to 7% is a positive and prudent move. Here are my perspectives on the key aspects:   1. Pause in the rate hike cycle: Anticipate a protracted pause in the short-term key lending rate due to the increasing GDP growth and controllable inflation. This will provide much-needed relief to businesses and individuals struggling with high borrowing costs.   2. Stable economic growth: India's GDP growth of 7.6% in Q2 FY23-24 demonstrates a resilient and vigorous economic revival. The RBI's updated projection of a 7% expansion for the whole fiscal year further reinforces this optimistic perspective.   3. Inflation remains a concern: While the recent decline in inflation to a four-month low is encouraging, continued vigilance is necessary. The RBI's focus on withdrawal of accommodation w...
Post a Comment
Read more

The Dynamics of Finance-Growth Nexus in Advanced Economies

This study investigates the relationship between finance and economic growth in advanced economies as these countries experience significantly higher levels of financial development. Using a fully balanced panel of 31 years from 1983 to 2013 for 24 economies, we provide new evidence on the finance-growth relationship. We evidence the presence of nonlinearity as there is an inverted U-shaped relationship between finance and growth in the long run. The results show that there exists a threshold effect of the finance-growth relationship estimated at 142 percent of GDP. We find that surpassing the threshold would cost the countries instead of furthering economic growth as too much finance is harmful. Based on the panel Granger causality test results, we argue that financial development should be associated with optimal growth performance. Our findings for the advanced economies provide useful inferences to the emerging and developing economies in designing their financial dev...
Post a Comment
Read more

Monetary and Fiscal Policy Coordination during the Fiscal Dominance Regimes

Key points • This study empirically examines the interaction between monetary and fiscal policy by using Vector Auto Regressions (VAR) and a Vector Error Correction Model (VECM) and explores the need for coordination. • The Stackelberg interaction model with government leadership to know the strategic interaction between monetary and fiscal policy is analyzed. • The findings show that an unexpected increase in the monetary policy effect: (i) has a contractionary impact on the economic growth; (ii) leads to a gradual decline in the inflation; (iii) tightens the liquidity conditions; and (iv) rise in the bond yields. On the other hand, an unexpected increase in the fiscal policy effect: (i) has a positive effect on GDP growth; (ii) has an initial decline, but a gradual rise in the inflation levels; and (iii) leads to falling bond yields. • Monetary policy is found to be more responsive to fiscal policy effects. The results imply that there is a greater need for effective coordinat...
Post a Comment
Read more