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Does an Increase in Government Debt Threaten Economic Growth Recovery Via Tightening Credit Conditions?

In: Achieving Price, Financial and Macro-Economic Stability in South Africa

Author

Listed:
  • Nombulelo Gumata

    (South African Reserve Bank)

  • Eliphas Ndou

    (South African Reserve Bank)

Abstract

Evidence in this chapter reveals that a positive standard deviation increase in government debt to GDP leads to a significant tightening in credit conditions. The unexpected tightening in credit conditions leads to a significant contraction in GDP, household consumption, gross fixed-capital formation, business and consumer confidence. The counterfactual analysis shows that GDP, investment and household consumption decline more when the credit conditions channel is active in the model and transmits positive government debt shocks compared to when this channel is shut off. This suggests that the tightening in credit conditions due to an unexpected increase in government gross loan debt worsens the delay in the recovery of economic growth. This implies that there is an urgent need for policy interventions that loosen credit conditions.

Suggested Citation

  • Nombulelo Gumata & Eliphas Ndou, 2021. "Does an Increase in Government Debt Threaten Economic Growth Recovery Via Tightening Credit Conditions?," Springer Books, in: Achieving Price, Financial and Macro-Economic Stability in South Africa, chapter 0, pages 181-188, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-66340-7_12
    DOI: 10.1007/978-3-030-66340-7_12
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