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The laffer curve and the debt-growth link in low-income Sub-Saharan African economies

Kelbesa Megersa

MPRA Paper from University Library of Munich, Germany

Abstract: The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is sensitive to the level of debt. Our paper tries to address the question of non linearity in the long term relationship between public debt and economic growth. Specifically, we set out to test if there exists an established ‘laffer curve’ type relationship, where debt contributes to economic growth up to a certain point (maximal threshold) and then starts to have a negative effect on growth afterwards. To carry out our tests, we have used a methodology that delivers a superior test of bell shapes, in addition to the traditional test based on a regression with a quadratic specification. The results show evidence of a bell-shaped relationship between economic growth and total public debt in a panel of low income Sub-Saharan African economies. This supports the hypothesis that debt has some positive contribution to economic growth in low-income countries, albeit up to a point. If debt goes on increasing beyond the level where it would be sustainable, it may start to be a drag on economic growth.

Keywords: public debt; economic growth; laffer curve; low-income countries; Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: C1 C12 C14 C4 E62 G01 H5 H61 H63 H68 N17 O1 O11 O55 P52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-afr, nep-fdg, nep-gro, nep-mac and nep-pub
Date: 2014-03-12
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https://mpra.ub.uni-muenchen.de/54362/1/MPRA_paper_54362.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/76594/1/MPRA_paper_54362.pdf revised version (application/pdf)

Related works:
Journal Article: The laffer curve and the debt-growth link in low-income Sub-Saharan African economies (2015) Downloads
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