Economics at your fingertips  

Debt and growth: Decomposing the cause and effect relationship

Vighneswara Swamy ()

International Journal of Finance & Economics, 2020, vol. 25, issue 2, 141-156

Abstract: This study provides a data‐rich analysis of the dynamics of government debt and economic growth for a longer period (1960–2009). It spans across different debt regimes and involves a worldwide sample of countries that is more representative than that of studies confined to advanced countries. This study observes a negative relationship between government debt and growth. The point estimates of the range of econometric specifications suggest that a 10‐percentage point increase in the debt‐to‐gross domestic product ratio is associated with 23 basis point reduction in average growth. The results establish the nonlinear relationship between debt and growth. Further, by employing panel vector autoregressions approach, this study decomposes the cause and effect relationship between debt and growth and offers an answer to the question—Does high debt lead to low growth or low growth leads to high debt? The results derived from the impulse–response functions and variance decomposition show the evidence of the long‐term effect of debt on economic growth. The results indicate that the effect is not uniform for all countries but depends mostly on the debt regimes and other important macroeconomic variables like inflation, trade openness, general government final consumption expenditure, and foreign direct investment.

Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().

Page updated 2021-12-18
Handle: RePEc:wly:ijfiec:v:25:y:2020:i:2:p:141-156