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In Search Of An Optimal Debt Ratio For Economic Growth

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  • David J. Smyth
  • Yu Hsing
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    Abstract

    This paper extends the work of Barro (1979), Eisner (1992), foines (1991), Sawhney and DiPietro (1994), and others and examines whether an optimal debt ratio exists that will maximize economic growth. The growth rate of real GDP is specified as a function of the debt ratio, the debt ratio squared, the growth rates of labor employment, capital services, money stock, and a trend variable. The sample ranges from 1960 to 1991. Hypothesis tests show that economic growth and its determinants, including the debt ratio are cointegrated and have a long-run stable relationship. Results also indicate that the optimal debt ratio is 38.4 percent for debt held by the public and 48.9 percent for total debt. Thus, the current (1993) debt ratios of 50.9 percent for the debt held by the public and 68.2 percent for total debt are far greater than the desirable levels. Copyright 1995 Western Economic Association International.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7287.1995.tb00731.x
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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

    Volume (Year): 13 (1995)
    Issue (Month): 4 (October)
    Pages: 51-59

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    Handle: RePEc:bla:coecpo:v:13:y:1995:i:4:p:51-59

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    Cited by:
    1. Ali Salman Saleh, 2006. "Long-Run Linkage Between Budget Deficit And Trade Deficit In Lebanon: Results From The Uecm And Bounds Tests," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 14(1), pages 29-48, December.
    2. Petia Topalova & Dan Nyberg, 2010. "What Level of Public Debt Could India Target?," IMF Working Papers 10/7, International Monetary Fund.
    3. Chowdhury, Khorshed & Saleh, Ali Salman, 2007. "Testing the Keynesian Proposition of Twin Deficits in the Presence of Trade Liberalisation: Evidence from Sri Lanka after War: the case of a bridge too far?," Economics Working Papers wp07-09, School of Economics, University of Wollongong, NSW, Australia.
    4. Hsing, Y., 2004. "Responses of Argentine Output to Shocks to Monetary Policy, Fiscal Policy and Exchange Rates: A VAR Model," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 4(1).
    5. Yu Hsing, 2004. "Response of Venezuelan output to monetary policy, deficit spending, and currency depreciation: a VAR model," REVISTA DE ECONOM√ćA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO.
    6. Vis, Barbara & Woldendorp, Jaap & Keman, Hans, 2007. "Do miracles exist? Analyzing economic performance comparatively," Journal of Business Research, Elsevier, vol. 60(5), pages 531-538, May.
    7. Checherita-Westphal, Cristina & Rother, Philipp, 2012. "The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area," European Economic Review, Elsevier, vol. 56(7), pages 1392-1405.

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