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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
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. 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.
    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)

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    More about this item

    Keywords

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    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

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