This paper responds to the development policy debate involving the world bank and the imf on the use of fiscal policy not only for economic stabilization but also. In order to make this point, the paper proceeds as follows. Public debt and economic growth economic systems matter. As capital increases, the economy maintains its steadystate rate of economic growth. This level can be significant for these countries as they still display some structural weaknesses and have difficulties accessing the financial markets in times of financial crises. For this purpose two models public debt model and growth model, have been used in this study. The paper investigates whether differences in public sector management quality affect the link between public debt and economic growth in developing countries. One of the most important aspects of human development is the ability to have a decent standard of living. In section 3 we present the endogenous growth model with public capital and government debt.
A key issue in this debate relates to the effect of the composition of public expenditure, and its financing, on economic growth. The section iii analyses the trends in public debt and economic growth. We assume that the government invests in a productive public capital stock that raises aggregate production possibilities. For this purpose, we primarily use world banks institutional indices of public sector management psm. Public debt, economic growth, sustainability, fiscal policy, interest rate 1. Theoretical arguments that suggest that high public debt has a negative effect on gdp growth are in line with a growing empirical literature which shows that there is a negative nonlinear correlation between public debt and economic growth in advanced and emerging market economies reinhart and rogoff, 2009, reinhart and rogoff, 2010a. Public debt and the dynamics of economic growth alfred greiner department of business administration and economics bielefeld university, bielefeld, germany email. The krugman 1988 debt overhanging theory suggests that if fu. The empirical results show that the interaction term between public. Munich personal repec archive fiscal policy, public expenditure composition and growth. The section iv and v deal with the research objective, models specification, sample size and sources of data and definitions of the related variables. The secret of the economic miracle of many countries that have high standard of living, in fact, is simple and quite obvious. Modern research on sustainability of debt policies that applies statistical tests has started with the contribution by hamilton and flavin 1986 who analyzed whether the series of public debt in the usa contains a bubble term.
The current paper lays out a research strategy to explore the e. According to the neoclassical growth theory, debt has a positive direct effect on economic growth. An endogenous growth model with public capital and. E et al 2008 used two models to capture both linear and nonlinear relationship of external debt in economic growth in the study on the impact of nigerias external. These relationships were found to be significant as well. Fiscal sustainability and public debt in an endogenous. A key issue in this debate relates to the effect of the composition of public expenditure on economic growth. From estimation by the generalized moments method in the system of the relationship between economic growth and outstanding public debt on data of the gabonese economy, we get that an increase in the public debt in this country, causes a deceleration of economic activity, thus reflecting a scissor effect between public debt trend and that of. Public debt, economic growth, bounds testing, euro area. Alfred greiner bettina fincke public debt, sustainability and economic growth theory and empirics 123. Therefore, increasing capital has only a temporary and limited impact on increasing the economic growth. Using psm thresholds, we split our panel into country clusters and make comparisons. Public debt and the dynamics of economic growth annals of. Public debt, corruption and sustainable economic growth mdpi.
Fiscal policy, public expenditure composition, and growth theory and. Debt and growth graduate institute of international and. The current paper lays out a research strategy to explore the effects of fiscal policy, including the composition of public expenditure, on economic growth, using a time series approach. Policy makers and some researchers have argued that expenditure on growth enhancing functions could enhance future revenue and justify the provision of fiscal space in the budget. Public debt, sustainability and economic growth theory. From estimation by the generalized moments method in the system of the relationship between economic growth. The debt model has been used to identify the nature and extent relationship of total public debt with the variables total consumption, manufacturing sector growth, tax revenue, subsidy, net export and total government stock. The aim of this work is to demonstrate that public overindebtedness negatively impacts economic activity in developing countries. The focus in this book is on fiscal policy issues, but it also deals with monetary policy aspects. This paper examines whether the solow growth model is consistent with the international variation in the standard of living. Public debt sustainability among the advanced economies has received much attention.
In this paper, we propose a new instrument for public debt and show that instrumental variable regressions do not provide evidence that public debt. We analyze the effects of public debt on economic growth and its dynamics in a basic. Public debt, economic growth and nonlinear effects. The empirics of economic growth 409 finally, we discuss the predictions of the solow model for. The theoretical literature on debt sustainability, with a particular attention to the imfworld bank approach, and the effects that a large external debt and fiscal deficit have on economic growth in lowincome. Read here pdf public debt sustainability and economic growth.
The open innovation theory focuses on structures and institutions that beat growth limits of. Fiscal sustainability and public debt in an endogenous growth. Theory and empirics public debt has become a severe problem for a great many economies. A number of other studies have looked at the impact of external debt on economic growth in developing economies. He finds that the public external debt has a negative relationship with per capita gdp and investment in pakistan, confirming the existence of a debt overhang effect. Explaining theories of economic growth economics help. As regards the empirical relevance, there is strong evidence that govern ments do raise the. The public debt togdp ratio elasticity of the real growth rate. Weil this paper examines whether the solow growth model is consistent with the international variation in the standard of living. Jul 01, 2016 read books economic growth and sustainability. External debt is a major source of public receipts and financing capital accumulation in. Apr 20, 2016 this paper responds to the development policy debate involving the world bank and the imf on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. Public debt, economic growth and public sector management in. Chapter 4 extends the basic endogenousgrowth model from chap.
Using nonlinear threshold models, we show that the negative nonlinear. In fact, the sustainability of debt dynamics has gained significant importance. Public debt has become a severe problem for a great many economies. But there are no simple ways to identify the growthmaximizing composition of public expenditure. Willi semmler, alfred greiner, bobo diallo, armon rezai and anand rajaram k september 2006 abstract this paper responds to the development policy debate involving the world bank. Mar, 2015 for this purpose two models public debt model and growth model, have been used in this study. Potential and constraints of public debt as a tool for. Public debt, sustainability and economic growth theory and. Download citation public debt, sustainability and economic growth. While the effects of tax policies on the allocation of resources are readily derived, the mechanisms that make public deficits and.
If youre looking for a free download links of public debt, sustainability and economic growth. Public debt has develop right into a excessive disadvantage for a superb many economies. Fiscal policy, public expenditure composition, and growth theory and empirics ingles resumo. Impact of public debt on economic growth in advanced economies. This paper puts the reinhartrogoff dataset to a formal econometric testing to see whether public debt has a negative nonlinear effect on growth if public debt exceeds 90% of gdp. Theory and empirics willi, semmlero and alfred, greiner and bobo, diallo and anand, rajaram and armon, rezai bielefeld university, world bank, university of economics and business, vienna. But there are no simple ways to identify the growth maximizing composition of public expenditure. Impact of public debt on economic growth in advanced. In section 2, we present our arguments about fiscal uncertainty driving growth effects of public debt in clusters of countries sharing similar. In standard overlapping generation models of growth public debt reduces savings and capital accumulation via higher interest rates, thus weakening economic growth modigliani, 1961, diamond, 1965, blanchard, 1985. Fiscal policy, public expenditure composition and growth.
Investigating the impact of public debt on economic growth in. Investigating the impact of public debt on economic growth. The multiple attempts at empirical evidence, yet recent, fail to truly dispel the theoretical vagueness of the effects of public debt on economic growth. The constant need for governments to borrow in order to finance budget deficit has led to the creation of external debt osinubi and olaleru, 2006. Theory and empirics greiner, alfred, fincke, bettina on. The tests for nonlinearity shows evidence of an inverseu shape relationship between public debt and economic growth. Fiscal policy, public expenditure composition, and growth. The theoretical analysis is complemented with empirical time series analyses on debt sustainability and with panel studies dealing with the relationship between public debt and economic growth. A contribution to the empirics of economic growth n. While the effects of tax policies on the allocation of resources are readily derived, the mechanisms that make public deficits and debt influence the economy are not so easily understood. The neoclassical theory of economic growth suggests that increasing capital or labour leads to diminishing returns. So, the relationship between public debt and growth from the conventional standpoint takes the.
However, we fail to see a similar significant relationship on country clusters that account for psm quality. Public debt and economic growth nexus munich personal repec. Public debt, sustainability and economic growth springerlink. This paper responds to the development policy debate involving the world bank and the imf on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. Empirical evidence for the advanced european countries, romanian journal. Pdf public debt sustainability and economic growth. Theory and empirical evidence chapter september 2015 with 88 reads. Theory and empirics this paper responds to the development policy debate involving the world bank and the imf on the use of fiscal policy not only for economic stabilization but also.
Public debt, economic growth and public sector management. Yet, countries with well managed public sectors demonstrate a higher public debt sustainability threshold. Fiscal policy, public expenditure composition, and growth theory and empirics english abstract. In endogenous growth models public debt has generally a negative effect on longrun growth barro, 1990, saintpaul, 1992. Policy makers and some researchers have argued that expenditure on growthenhancing functions could enhance future revenue and justify the provision of fiscal space in the budget. Whereas the results of tax insurance coverage insurance policies on the allocation of belongings are readily derived, the mechanisms. Model results also show that the real gdp growth rate does not decline sharply whether the public debt togdp ratio is lower than 220%.
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