Role of Governance in Debt-Growth Relationship: Evidence from Panel Data Estimations

Qamar Abbas, Li Junqing, Muhammad Ramzan and Sumbal Fatima
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Qamar Abbas: School of Economics, Nankai University, Tianjin 300071, China
Li Junqing: School of Economics, Nankai University, Tianjin 300071, China
Muhammad Ramzan: School of Economics, Nankai University, Tianjin 300071, China
Sumbal Fatima: Higher Education Research Institute, Zhou Enlai School of Government, Nankai University, Tianjin 300071, China

Sustainability, 2021, vol. 13, issue 11, 1-19

Abstract: This paper provides an empirical analysis of the relationship between debt and national output mediated by a measure of the quality of state governance. Using WGIs dataset of 106 countries for the period 1996–2015, the paper analyzes the mediated effect of governance on debt-growth relationship. For this purpose, we use the fixed effect (LSDV) and system GMM estimation technique in order to overcome the possible problem of endogeneity. Results show the non-linear pattern between public debt and economic growth via governance. Although, public debt has negative impact on economic growth, but the results are statistically positive and significant when public debt is interacted with governance, which confirms that governance is a channel by which public debt influences economic growth. Moreover, we calculate the threshold of governance which shows that the public debt has positive impact on economic growth when the governance level is higher than the threshold and adversely affects the economic growth in the case of low level of governance than threshold. Evidence from this study reveals the fact that governance plays a mediating role in debt-growth relationship as there is a pattern of complementarity between public debt and governance: the higher the level of governance, the lesser the adverse effect of public debt on economic growth.

Keywords: public debt; governance; economic growth; system GMM estimator (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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