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The Dynamics of Government Debt and Economic Growth

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  • Swamy, Vighneswara

Abstract

The dynamics of government debt and economic growth, once a subject of interest mostly to very few macroeconomists is suddenly of immense attention for many researchers in the backdrop of Euro zone sovereign debt crisis and Reinhart & Rogoff’s related research. This study investigates the government debt – growth relationship and contributes to literature in the following ways: First, we extend the horizon of analysis to several country groupings and make the study inclusive of economic, political and regional diversities based on a sizeable dataset. Second, we provide evidence for the presence of a causal link going from debt to growth with the use of ‘instrumental variables approach’ unlike the RR approach. Third, we overcome the issues related to data adequacy, coverage of countries, heterogeneity, endogeneity, and non-linearities by conducting a battery of robustness tests. We find that a 10-percentage point increase in the debt-to-GDP ratio is associated with 2 to 23 basis point reduction in average growth. Our results establish the nonlinear relationship between debt and growth.

Suggested Citation

  • Swamy, Vighneswara, 2015. "The Dynamics of Government Debt and Economic Growth," MPRA Paper 63693, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:63693
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    References listed on IDEAS

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    Cited by:

    1. Kummer-Noormamode, Sabina, 2018. "The Relationship between Public Debt and Economic Growth: Nonlinearity and Country-Specificity," MPRA Paper 98075, University Library of Munich, Germany.
    2. Arup Mitra & Basanta K Pradhan, 2016. "Migration, Remittances, and Changing Patterns of Livelihood Evidence from Western Odisha Villages," IEG Working Papers 363, Institute of Economic Growth.
    3. Yu HSING, 2020. "On the relationship between economic growth and government debt for Bulgaria. Test of the Reinhart-Rogoff hypothesis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(625), W), pages 187-194, Winter.
    4. Suresh Sharma & Jyoti Saini, 2016. "Impact of Antenatal Check-ups on Institutional Deliveries in Delhi," IEG Working Papers 365, Institute of Economic Growth.
    5. Taha Zaghdoudi, 2020. "Threshold Effect in the Relationship Between External Debt and Economic Growth: A Dynamic Panel Threshold Specification," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 447-456, June.
    6. Arup Mitra & Basanta K Pradhan, 2016. "Source of Livelihood and Inter-Temporal Mobility Evidence from Western odisha Villages," IEG Working Papers 364, Institute of Economic Growth.

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    More about this item

    Keywords

    Government Debt; economic growth; panel data; nonlinearity; country groupings;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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