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Does government debt crowd out capital formation? A dynamic approach using panel VAR

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  • Liaqat, Zara

Abstract

We estimate a panel vector autoregression model using data for 127 countries from 1980 to 2017 in order to identify the dynamic relationship between public debt and the growth of capital formation. Our results provide evidence for the crowding-out effect of government debt and the subsequent drop in output growth. The impulse response functions for sub-samples of countries reveal two remarkable results. First, the response of capital formation to a shock in debt appears to be consistent across different income categories of countries, and does not depend on the size of debt-to-GDP ratio. Second, the magnitude and persistence of this effect is lower for the high-income countries. The results obtained are robust to various model specifications as well as for alternative proxies of debt and capital formation.

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  • Liaqat, Zara, 2019. "Does government debt crowd out capital formation? A dynamic approach using panel VAR," Economics Letters, Elsevier, vol. 178(C), pages 86-90.
    • Handle: RePEc:eee:ecolet:v:178:y:2019:i:c:p:86-90
    DOI: 10.1016/j.econlet.2019.03.002
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    More about this item

    Keywords

    Crowding-out; Public debt; Capital formation; Panel VAR;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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