The Debt-Openness Puzzle

The ‘debt-openness puzzle’ is investigated in this research by determining the effect of trade liberalisation on rising debt levels and if BRICS nations trade openness and government debt have a different connection than advanced economies. Using panel generalised method of moments (PGMM) regressions, we investigate the causes of debt in the advanced, developing, and BRICS economies. The study provides a robustness check using the pooled mean group (PMG) / panel autoregressive distributive lag (ARDL) approach. The research uncovered three primary results. Firstly, in developed economies, there is an initial positive correlation between openness to trade and debt in the short term, but in the long run, this relationship becomes negative, suggesting a nonlinear connection. Secondly, in the short and long term, the BRICS exhibit a notable trend where trade openness and debt positively correlate. Lastly, panel Granger causality studies indicate a one-way relationship between trade openness and debt. The study infers that countries should approach trade openness cautiously, implement appropriate policies and measures to protect indigenous firms and local jobs, and maintain fiscal health without incurring excessive debt. Such policies should enhance productivity and competitiveness and support innovation to promote long-term sustainable economic growth.