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Determinants of Public Debt for middle income and high income group countries using Panel Data regression

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  • Sinha, Pankaj
  • Arora, Varun
  • Bansal, Vishakha

Abstract

To be able to predict when a nation will go bust has been one of toughest challenges in macroeconomics. Considerable research and effort has been put into this direction but still we are not in a position to say anything with certainty. This paper analyzes panel pool data on 31 countries across the world for the past 30 years on the basis of which the possibility of a sovereign default can be explored. The aim of this study is to understand which all factors influence the public debt in middle and high income group countries using Panel regression. Total effects model, Cross section fixed effects model, Cross section random effects model have been used to understand the factors whereas Autoregressive multiple regression model has been used to forecast the debt figures. The research findings suggest that the most important determinant of debt situation is GDP growth rate for both high and middle income group countries. In addition to this, Central government expenditure, education expenditure and Current account balance are also seen to influence the debt situation for both groups. FDI and Inflation have no impact on debt to GDP ratios among high income group countries but are found to be of more relevance when determining debt situation of middle income group countries. Population density and population above 65 years of age do not have any impact whatsoever on debt to GDP ratios of high and middle income group countries. Forecasts for weighted average public debt for high income group countries indicate steady increase. Debt situation of countries including Switzerland, Korea, Slovak rep, France and Japan is likely to worsen over the next 5 years. The debt situation of Greece and Spain is unlikely to change much whereas Ireland, USA, Canada, Italy, Hungary are expected to get better till 2015.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32079.

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Date of creation: 18 Mar 2011
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Handle: RePEc:pra:mprapa:32079

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Keywords: Public debt; panel data; debt forecasting; Cross section fixed effects; cross section random effects;

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  1. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  2. Jushan Bai & Serena Ng, 2001. "A Panic Attack on Unit Roots and Cointegration," Economics Working Paper Archive 469, The Johns Hopkins University,Department of Economics.
  3. Rembert De Blander & Geert Dhaene, 2012. "Unit root tests for panel data with AR(1) errors and small T," Econometrics Journal, Royal Economic Society, vol. 15(1), pages 101-124, 02.
  4. Christian Broda & David E. Weinstein, 2004. "Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability," NBER Working Papers 10988, National Bureau of Economic Research, Inc.
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