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Public Debt, Economic Growth, and Inflation in African Economies

Listed author(s):
  • Lopes da Veiga, José
  • Ferreira-Lopes, Alexandra
  • Sequeira, Tiago

We analyse the implications of public debt on economic growth and inflation in a group of 52 African economies between 1950 and 2012. The results indicate that the limits of public debt affect economic growth and exhibit negatively, from a given level of debt, an inverted U behaviour regarding the relationship between economic growth and public debt. The highest average rates of real and per capita growth are achieved when public debt reaches 60% of the real GDP and an average inflation rate of 8.2%. When this ratio falls between 60-90%, the average rate of economic growth drops by up to 1.32 p.p. and continues dropping by up to 1.64 p.p. when the ratio exceeds 90%. Briefly, the high levels of public debt are reflected in reduced rates of economic growth and rising levels of inflation. Our results for three specific geographical areas resemble those of the overall analysis, despite some differences. In North African countries, the growth rates of the GDP and inflation also show an inverted U behaviour as the ratio of public debt/GDP increases. The highest rate of economic growth is recorded when the ratio public debt/GDP is below 30% of GDP and corresponds to an average inflation rate of 5.33%. Identical behaviour of the GDP growth rates and inflation also appears in Sub-Saharan countries until the third interval (60-90%). However, the highest growth rate of the GDP and GDP per capita is registered when the public debt/GDP ratio is in the second interval (30-60%). For SADC countries, the highest average rate of economic growth (6.8%) is similar to North African countries, when the ratio public debt/GDP is below 30% of GDP, with an average inflation rate of 11%. The high level of public debt is reflected in reduced rates of economic Growth and increasing inflation rates.

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File URL: https://mpra.ub.uni-muenchen.de/57377/1/MPRA_paper_57377.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 57377.

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Date of creation: 17 Jul 2014
Handle: RePEc:pra:mprapa:57377
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  1. Huixin Bi & Wenyi Shen & Susan S. Yang, 2014. "Fiscal Limits, External Debt, and Fiscal Policy in Developing Countries," IMF Working Papers 14/49, International Monetary Fund.
  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. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
  4. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
  5. Escobari Diego & Mollick André Varella, 2013. "Output growth and unexpected government expenditures," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 1-33, September.
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  7. James Tobin, 1970. "Rejoinder," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 328-329.
  8. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
  9. Iyoha, M.A., 1999. "External Debt and Economic Growth in Sub-SAharan African Countries: an Econometric Study," Papers 90, African Economic Research Consortium.
  10. Jakob Christensen, 2005. "Special Data Section Domestic Debt Markets in Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 1-7.
  11. BILDIRICI, Melike & ERSIN, Ozgur Omer, 2007. "Domestic Debt, Inflation And Economic Crises: A Panel Cointegration Application To Emerging And Developed Economies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1).
  12. Toan Quoc Nguyen & Benedict J. Clements & Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 03/249, International Monetary Fund.
  13. Tito Cordella & Luca A Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link," IMF Working Papers 05/223, International Monetary Fund.
  14. Goohoon Kwon & Lavern McFarlane & Wayne Robinson, 2009. "Public Debt, Money Supply, and Inflation: A Cross-Country Study," IMF Staff Papers, Palgrave Macmillan, vol. 56(3), pages 476-515, August.
  15. James Tobin, 1970. "Money and Income: Post Hoc Ergo Propter Hoc?," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 301-317.
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