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The Impact of Public Debt on Economic Growth: Empirical Analyses for Western Balkan Countries

In: Economic and Financial Challenges for Balkan and Eastern European Countries

Author

Listed:
  • Abdylmenaf Bexheti

    (South East European University)

  • Luljeta Sadiku

    (International Balkan University)

  • Murat Sadiku

    (South East European University)

Abstract

This paper intends to empirically analyze the impact of public debt on economic growth of Western Balkan countries using yearly data for the time period 2003–2016. The study employs panel regression techniques, such that fixed and random effects, 2SLS, as well as a causality test after a panel VAR. The short-run estimation results, in almost all specifications and models, indicate that public debt is weakly negatively correlated with economic growth of the sample countries, but the coefficient is only statistically significant in random effects as well as in 2SLS model. The quadratic term of debt is also included in the model, reflecting the nonlinear relationship of debt and growth. Its results disclose a maximum debt threshold of 50.87%. While the causality test reveals a uni-directional relationship, meaning that public debt does not cause real GDP growth, whereas GDP growth causes public debt. The policy implications for the region are that governments should take actions for a fiscal sustainability and active debt management as the rise of the level of debt above the found threshold of 50.87% of GDP will deteriorate the economic growth. In addition, fiscal policies need to be designed, through cyclical adjusting fiscal policies based on business cycles.

Suggested Citation

  • Abdylmenaf Bexheti & Luljeta Sadiku & Murat Sadiku, 2020. "The Impact of Public Debt on Economic Growth: Empirical Analyses for Western Balkan Countries," Springer Proceedings in Business and Economics, in: Marietta Janowicz-Lomott & Krzysztof Łyskawa & Persefoni Polychronidou & Anastasios Karasavvoglou (ed.), Economic and Financial Challenges for Balkan and Eastern European Countries, pages 13-32, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-39927-6_2
    DOI: 10.1007/978-3-030-39927-6_2
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    Cited by:

    1. Rosnawintang Rosnawintang & Tajuddin Tajuddin & Pasrun Adam & Yuwanda Purnamasari Pasrun & La Ode Saidi, 2021. "Effects of Crude Oil Prices Volatility, the Internet and Inflation on Economic Growth in ASEAN-5 Countries: A Panel Autoregressive Distributed Lag Approach," International Journal of Energy Economics and Policy, Econjournals, vol. 11(1), pages 15-21.
    2. Besnik Fetai & Kestrim Avdimetaj & Abdylmenaf Bexheti & Arben Malaj, 2020. "Threshold effect of public debt on economic growth: An empirical analysis in the European transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 381-406.

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