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Government Debt and Economic Growth:Estimating the Debt Thresholds and Debt Intolerance

Author

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  • Vighneswara Swamy

    (Institute of Economic Growth, Delhi)

Abstract

In the context of rising government debt levels in advanced economies and the ongoing euro zone debt crisis, there has been a revival of academic and policy debate on the impact of growing government debt on economic growth. This data-rich study offers an econometric investigation of the macroeconomic determinants of government debt and answers the much-debated question –What factors influence the government debt in a sovereign country? The study provides analyses for economy groupings, political governance groupings and income groupings of countries in addition to the full sample. Panel Granger causality testing is employed to establish causality running from the determinants of debt. The results of the full sample analysis reveal that real GDP growth, foreign direct investment, government expenditure, inflation and population growth have negative effect on debt. Gross fixed capital formation, final consumption expenditure, and trade openness have positive effect on debt. The results for different country groupings bring out some interesting implications

Suggested Citation

  • Vighneswara Swamy, 2015. "Government Debt and Economic Growth:Estimating the Debt Thresholds and Debt Intolerance," IEG Working Papers 362, Institute of Economic Growth.
    • Handle: RePEc:awe:wpaper:362
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    References listed on IDEAS

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    1. Jaejoon Woo & Manmohan S. Kumar, 2015. "Public Debt and Growth," Economica, London School of Economics and Political Science, vol. 82(328), pages 705-739, October.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    3. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
    4. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    5. Aizenman, Joshua & Kletzer, Kenneth, 2007. "Economic Growth with Constraints on Tax Revenues and Public Debt: Implications for Fiscal Policy and Cross-Country Differences," Santa Cruz Department of Economics, Working Paper Series qt9421k9hq, Department of Economics, UC Santa Cruz.
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    Cited by:

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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
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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