IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/125658.html
   My bibliography  Save this paper

Debt Dynamics and Economic Growth

Author

Listed:
  • Idrees, Muhammad

Abstract

This paper assesses the impact of unanticipated shocks to public debt on Pakistan’s economic growth. Following the methodology of Soyres, Kawai, and Wang (2022), a series of forecast errors is constructed to serve as exogenous shocks in analyzing their effects on real GDP. Using data from 1994 to 2023, the analysis reveals that a 1.0 percent unanticipated increase in the debt-to-GDP ratio leads to a 0.14 percent decline in real GDP in the subsequent year. This negative impact highlights the need to identify a debt threshold beyond which economic growth is adversely affected. Applying threshold regression techniques, a critical debt threshold of 57 percent is estimated for Pakistan. The findings underscore the importance of gradual fiscal adjustments to place the debt-to-GDP ratio on a declining and sustainable path.

Suggested Citation

  • Idrees, Muhammad, 2025. "Debt Dynamics and Economic Growth," MPRA Paper 125658, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125658
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/125658/1/MPRA_paper_125658.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Constance de Soyres & Reina Kawai Eskimez & Mengxue Wang, 2022. "Public Debt and Real GDP: Revisiting the Impact," IMF Working Papers 2022/076, International Monetary Fund.
    2. Caner, Mehmet & Grennes,Thomas & Koehler-Geib, Fritzi, 2010. "Finding the tipping point -- when sovereign debt turns bad," Policy Research Working Paper Series 5391, The World Bank.
    3. Naeem AKRAM*, 2017. "Role of Public Debt in Economic Growth of Sri Lanka: An ARDL Approach," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 27(2), pages 189-212.
    4. Lucas Sagire & Peter W. Muriu, 2021. "Economic Growth and Public Debt Threshold: New Evidence from An Emerging Economy," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 46(4), pages 105-120.
    5. Julia Estefania‐Flores & Davide Furceri & Siddharth Kothari & Jonathan D. Ostry, 2023. "Worse than you think: Public debt forecast errors in advanced and developing economies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(3), pages 685-714, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kelbesa Megersa & Danny Cassimon, 2015. "Public Debt, Economic Growth, and Public Sector Management in Developing Countries: Is There a Link?," Public Administration & Development, Blackwell Publishing, vol. 35(5), pages 329-346, December.
    2. Cronin, David & McGowan, Kieran, 2023. "Government debt forecast errors and the net expenditure rule in EU countries," Papers WP756, Economic and Social Research Institute (ESRI).
    3. Yun Jung Kim & Jing Zhang, 2021. "The Relationship Between Debt and Output," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 230-257, March.
    4. Yannis Dafermos, 2015. "The ‘other half’ of the public debt–economic growth relationship: a note on Reinhart and Rogoff," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 12(1), pages 20-28, April.
    5. Antoine Gaudin & Brendan Harnoys Vannier & Martin Kessler, 2024. "A Critical Analysis of DSA Projections," Development, Palgrave Macmillan;Society for International Deveopment, vol. 67(3), pages 233-247, December.
    6. repec:rnp:ppaper:2309 is not listed on IDEAS
    7. M. Ayhan Kose & Peter Nagle & Franziska Ohnsorge & Naotaka Sugawara, 2021. "What has been the impact of COVID-19 on debt? Turning a wave into a tsunami," CAMA Working Papers 2021-99, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Balázs Égert, 2015. "Public debt, economic growth and nonlinear effects: Myth or reality?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 226-238.
    9. Andrea F Presbitero, 2012. "Total Public Debt and Growth in Developing Countries," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(4), pages 606-626, September.
    10. Andrián, Leandro & Hirs-Garzon, Jorge & Urrea, Ivan Leonardo & Valencia, Oscar, 2024. "Fiscal rules and economic cycles: Quality (always) Matters," European Journal of Political Economy, Elsevier, vol. 85(C).
    11. Siti Nurazira Mohd Daud & Jan M. Podivinsky, 2015. "Federal government debt and economic growth: Evidence from Malaysia," Progress in Development Studies, , vol. 15(3), pages 253-256, July.
    12. Belen Chocobar & Peter Claeys & Marcos Poplawski‐Ribeiro, 2025. "Fiscal Forecasting Rationality Among Expert Forecasters," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 44(3), pages 941-959, April.
    13. Furceri, Davide & Zdzienicka, Aleksandra, 2012. "How costly are debt crises?," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 726-742.
    14. Augustine, Blessy & Rafi, O.P.C. Muhammed, 2023. "Public debt - economic growth nexus in emerging and developing economies: Exploring nonlinearity," Finance Research Letters, Elsevier, vol. 52(C).
    15. Markus Eberhardt & Andrea Filippo Presbitero, 2013. "This Time They're Different: Heterogeneity;and Nonlinearity in the Relationship;between Debt and Growth," Mo.Fi.R. Working Papers 92, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    16. Amelie BARBIER-GAUCHARD & Emmanouil SOFIANOS, 2024. "Forecasting Public Debt in the Euro Area Using Machine Learning: Decision Tools for Financial Markets," Working Papers of BETA 2024-47, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    17. Craigwell, Roland & Greenidge, Kevin & Thomas, Chrystal & Drakes, Lisa, 2012. "Threshold Effects of Sovereign Debt: Evidence from the Caribbean," MPRA Paper 40936, University Library of Munich, Germany.
    18. Dreger, Christian & Reimers, Hans-Eggert, 2013. "Does euro area membership affect the relation between GDP growth and public debt?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 481-486.
    19. Islam, Iyanatul, & Ahmed, Ishraq. & Roy, Rathin. & Ramos, Raquel., 2012. "Macroeconomic policy advice and the Article IV consultations a development perspective," ILO Working Papers 994783713402676, International Labour Organization.
    20. Brandao-Marques, Luis & Casiraghi, Marco & Gelos, Gaston & Harrison, Olamide & Kamber, Gunes, 2024. "Is high debt Constraining monetary policy? evidence from inflation expectations," Journal of International Money and Finance, Elsevier, vol. 149(C).
    21. Lau, Evan & Moll de Alba, Jaime & Liew, Kim-Hing, 2022. "Debt and economic growth in Asian developing countries," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 599-612.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:pra:mprapa:125658. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.