The Impact of Public Debt on Economic Growth: Empirical Analyses for Western Balkan Countries

Abdylmenaf Bexheti (), Luljeta Sadiku () and Murat Sadiku ()
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Abdylmenaf Bexheti: South East European University
Luljeta Sadiku: International Balkan University
Murat Sadiku: South East European University

A chapter in Economic and Financial Challenges for Balkan and Eastern European Countries, 2020, pp 13-32 from Springer

Abstract: Abstract This paper intends to empirically analyze the impact of public debt on economic growth of Western Balkan countries using yearly data for the time period 2003–2016. The study employs panel regression techniques, such that fixed and random effects, 2SLS, as well as a causality test after a panel VAR. The short-run estimation results, in almost all specifications and models, indicate that public debt is weakly negatively correlated with economic growth of the sample countries, but the coefficient is only statistically significant in random effects as well as in 2SLS model. The quadratic term of debt is also included in the model, reflecting the nonlinear relationship of debt and growth. Its results disclose a maximum debt threshold of 50.87%. While the causality test reveals a uni-directional relationship, meaning that public debt does not cause real GDP growth, whereas GDP growth causes public debt. The policy implications for the region are that governments should take actions for a fiscal sustainability and active debt management as the rise of the level of debt above the found threshold of 50.87% of GDP will deteriorate the economic growth. In addition, fiscal policies need to be designed, through cyclical adjusting fiscal policies based on business cycles.

Keywords: Public debt; Economic growth; Random effects; 2SLS; Causality analysis (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-39927-6_2

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DOI: 10.1007/978-3-030-39927-6_2

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