IDEAS home Printed from https://ideas.repec.org/p/mil/wpdepa/2011-12.html
   My bibliography  Save this paper

Public debt, domestic and external financing, and economic growth

Author

Listed:
  • Natia KUTIVADZE

    ()

Abstract

This paper examines the effect of public debt on growth by controlling for the institutional environment in which the debt was issued in countries grouped by income levels for the period of 1990 to 2007. Our analysis distinguishes between the growth impact of domestic versus external public debt to examine the importance of domestic financing as compared to external financing. In particular, the regressions’ outcome points clearly in the direction of a non-linear relationship between total public debt and growth in the subsets of middle and low-income countries, and this relationship is mainly driven by the non-linear relationship that exists between public external debt and growth, and not by the domestic component of it. Otherwise stated, it appears that high levels of external public debt are associated with low per capita GDP growth rates, but that high levels of domestic public debt are not necessarily associated with low growth. We identify ranges of values for the optimal level of public debt (i. e. the level after which the marginal impact of further debt accumulation becomes harmful for growth) in middle and low-income countries. In a subset of high income countries, we did not find any support for a robust relationship between public debt and growth. Another noteworthy insight that emerges is a strong link between financial development and growth across a subset of middle-income countries. Our analysis shows that the debt structure is relevant to growth and highlights the importance of the development of the domestic bond markets to promote long-lasting economic growth.

Suggested Citation

  • Natia KUTIVADZE, 2011. "Public debt, domestic and external financing, and economic growth," Departmental Working Papers 2011-12, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  • Handle: RePEc:mil:wpdepa:2011-12
    as

    Download full text from publisher

    File URL: http://wp.demm.unimi.it/files/wp/2011/DEMM-2011_012wp.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    2. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2001. "Prospective Deficits and the Asian Currency Crisis," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1155-1197, December.
    3. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, pages 717-737.
    4. Missale, Alessandro & Blanchard, Olivier Jean, 1994. "The Debt Burden and Debt Maturity," American Economic Review, American Economic Association, pages 309-319.
    5. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, pages 688-726.
    6. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
    7. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, pages 573-578.
    8. Presbitero, Andrea F., 2008. "The Debt-Growth Nexus in Poor Countries: A Reassessment," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 2, pages 1-28.
    9. S. Fisher & R. Sahay & C. A. Vegh, 1997. "Stabilization and Growth in Transition Economies: The Early Experience," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
    10. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, pages 115-143.
    11. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    12. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, pages 253-268.
    13. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
    14. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, pages 253-268.
    15. S M Ali Abbas & Jakob E Christensen, 2010. "The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries and Emerging Markets," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 209-255, April.
    16. Koichi Futagami & Takeo Hori & Ryoji Ohdoi, 2010. "Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending," Working Papers id:2502, eSocialSciences.
    17. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    18. Sana Harrabi & Lobna Bousrih & Mohammed Salisu, 2007. "Debt Relief and Credit to the Private Sector in African Countries," African Development Review, African Development Bank, vol. 19(3), pages 469-480.
    19. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-1465, September.
    20. Anastasia Guscina & Olivier D Jeanne, 2006. "Government Debt in Emerging Market Countries; A New Data Set," IMF Working Papers 06/98, International Monetary Fund.
    21. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, pages 5-30.
    22. Schclarek, Alfredo, 2004. "Debt and Economic Growth in Developing and Industrial Countries," Working Papers 2005:34, Lund University, Department of Economics.
    23. Futagami, Koichi & Hori, Takeo & Ohdoi, Ryoji, 2010. "Debt Policy and Economic Growth in a Small Open Economy Model with Productive Government Spending," ADBI Working Papers 212, Asian Development Bank Institute.
    24. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, pages 688-726.
    25. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, pages 5-30.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Janda, Karel & Kravtsov, Oleg, 2017. "Time-varying Effects of Public Debt on the Financial and Banking Development in the Central and Eastern Europe," MPRA Paper 77325, University Library of Munich, Germany.

    More about this item

    Keywords

    Public debt; Financial Development; Economic Growth;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mil:wpdepa:2011-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEMM Working Papers). General contact details of provider: http://edirc.repec.org/data/damilit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.