Public Debt and Economic Growth in the Western Balkan Countries
Keywords:Economic Growth, Public Debt, Turning Point, Panel Date, the Western Balkans.
The paper empirically examines the relationship between public debt and economic growth in the Western Balkan countries during the period from 1995 to 2017 (both years inclusive). The study attempts to identify and determine the threshold values or the extent to which public debt-to-GDP ratio has a positive effect on economic growth, and beyond which point debt has a negative effect on the economic growth in Western Balkans countries. For this purpose, we employ different econometric models and techniques such as pooled OLS, fixed and random effects models, and GMM (Generalized Method of Moments). The results are consistent with the theoretical hypothesis that lower level of public debt has a positive effect on economic growth, and beyond certain threshold level it inverts into a negative effect on economic growth. The results show that the debt-to-GDP ratio turning point is between 50% and 60%, which means that any increase of public debt up to this point has a positive impact on economic growth, however, it inverts to a negative effect beyond this point. The findings of this study are useful for governments of Western Balkans countries, since it provides them with useful information about the level of public debt, i.e. the point at which the positive effects of public debt on economic growth turn negative.
Afonso, A., and Alves, J., 2015. ‘The Role of Government Debt in Economic Growth’, Hacienda Pública Española, Review of Public Economics, 215-(4/2015): 9-26 © 2015, Instituto de Estudios Fiscales DOI: 10.7866/HPE-RPE.15.4.1).
Afonso, A, and Alves, J, 2014. ‘The Role of Government Debt in Economic Growth’,WP16/2014/DE/UECE, ISSN 2183-1815,1-45, https://www.iseg.ulisboa.pt/aquila/getFile.do?method=getFile&fileId=509491&_request_checksum_=0858589fbfd82461e8d217f42c06b2ff64181cec
Adam, C, S., and Bevan, D, L., 2005. ‘Fiscal Policy Design in Low-Income Countries, in T. Addison and A. Roe (eds)’, New Fiscal Policies for Growth and Poverty Reduction, (Oxford, Oxford University Press).
Arellano, M, and Bover, O, 1995. ‘Another look at the instrumental variable estimation of error-components models’ , Journal of Econometrics, 68 (1995) 29-51,https://www.cemfi.es/~arellano/arellano-bover-1995.pdf.
Arellano, M, and Bond, S, 1991. ‘Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations’ The Review of Economic Studies, Vol. 58, No. 2 (Apr., 1991), pp. 277-297,http://www.jstor.org/stable/2297968.
Baum, A., and Checherita-Westphal, C., and Rother, P., 2013. ‘Debt and Growth: New Evidence for the Euro Area’, Journal of International Money and Finance, 32, 809–821. http://dx.doi.org/10.1016/j.jimonfin.2012.07.004.
Blundell, R, and Bond, S, 1997. ‘Initial conditions and moment restrictions in dynamic panel data models’Journal of Econometrics, 87 (1998) 115—143.
Blundell, R, and Bond, S, 1998. ‘GMM Estimation with Persistent Panel Data: An Application to Production Functions’, Econometric Reviews, 19(3), 32 1-340 (2000).https://www.ucl.ac.uk/~uctp39a/blundell-Bond-ER.pdf.
Blundell, R., Bond, S. and Windmeijer, F., 2000. ‘Estimation in Dynamic Panel Data Models: Improving on the Performance of the Standard GMM Estimator’, Advances in Econometrics, 15, 53-91. http://dx.doi.org/10.1016/S0731-9053(00)15003-0
Baldacci, E, and Kumar, M.S., 2010. ‘Fiscal Deficits, Public Debt, and Sovereign
Bond Yields’, IMF WorkingPaper Fiscal Affairs Department, WP/10/184, 1-30. doihttps://www.researchgate.net/publication/228317596_Fiscal_Deficits_Public_Debt_and_Sovereign_Bond_Yields/download.
Checherita, C, and Rother, P, 2010. ‘The Impact of Highand Growing Government Debt on Economic Growth an Empirical Investigation for theEuro Area’, European Central Bank, Working Papers Series, No 1237, 1-42, ISSN 1725-2806.
Cohen, D, 1993. ‘Low Investment and Large LDC Debt in the (1980s)’, American Economic Review,Vol. 83 (3), pp. 437–49.
Egert, B, 2013. ‘The 90% Public Debt Threshold: The Rise And Fall Of A Stylised Fact, Economics Department’,Working Papers No. 1055, ECO/WKP(2013)47,1-30. http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=ECO/WKP(2013)47&docLanguage=En.
Elmendorf, D.W., and Mankiw, G.N., 1998. ‘Government Debt Published: Handbook of Macroeconomics’, Vol. 1,
Taylor, J.B. and M. Woodford, eds., Elsevier Science, B.V., 1999, pp. 1615-1699.(DOI): 10.3386/w6470
Gnegne, Y, and Jawadi, F, .2013. ‘Boundedness and nonlinearities in public debt dynamics’,Economic Modelling, 34, (2013) pp. 154-160. https://doi.org/10.1016/j.econmod.2013.04.006/
Ghosh, A.,and Kim, J., and Mendoza, E.,and Ostry, J.,and Qureshi, M., 2013. ‘Fiscal Fatigue FiscalSpace and Debt Sustainability in Advanced Economies’, Economic Journal, vol. 0, pages F4-F30, 02.
Irons, J, and Bivens, J, 2010. ‘Government Debt and Economic Growth’, Economic Policy Institute, Briefing Paper, 271, 1-9. https://www.epi.org/files/page/-/pdf/BP271.pdf.
Kumar, M. S., And J. Woo, 2010. ‘Public Debt and Growth’, IMF Working Papers,10/174, 1-47. https://www.imf.org/external/pubs/ft/wp/2010/wp10174.pdf.
Mencinger, J, and Aristovnik, A, and Verbic, M, 2015. ‘Revisiting the Role of Public Debt in Economic Growth: the Case of OECD Countries’, Inzinerine Ekonomika-Engineering Economics, 26(1), 61-66. Doi http://dx.doi.org/10.5755/j01.ee.26.1.4551.
Panizza, U., and Presbitero, A. F., 2014. ‘Public Debt and Economic Growth in Advanced Economies’: A Survey, Mo Fir Working Paper No. 78, Ancona, Italy: MoFiR. Research group (Mo.FiR.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
Panizza, U., and Presbitero, A. F, 2013. Public Debt and Economic Growth in Advanced Economies: A Survey, Mo.FiR’, Working Papers 78, Money and Finance
Pescatori, A, and Sandri, D, and Simon, J., 2014. ‘Debt and Growth: Is There a Magic Threshold’, IMF Working Paper, WP/14/34, 1-19, https://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf.
Reinhart, C.M, and Rogoff, K.S., 2O10. ‘Growth in a Time of Debt, American Economic Review: Papers & Proceedings 100 (May 2010): 573–578.http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573.
Rankin, N. and B. Roffia, 2003. ‘Maximum sustainable government debt in the overlapping generations model’, The Manchester School 71 (3), 217-241.
Reinhart, Carmen M., and Kenneth S. Rogoff, 2010. ‘Growth in a Time of Debt’ ,American Economic Review, 100 (2): 573-78.DOI: 10.1257/aer.100.2.573, http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573
Schclarek, A., 2004. ‘Debt and Economic Growth in Developing Industrial Countries, Working Papers no.34, Department of Economics, Lund University, 2005,
Sala-i-Martin, X., Doppelhofer, G., & Miller, R, 2004. ‘Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach’, American Economic Review, 94(4), 813–835. http://dx.doi.org/10.1257/ 0002828042002570.
Wigger, B. U, 2009. ‘A note on public debt, tax-exempt bonds, and Ponzi games’, Journal of Macroeconomics, Elsevier, vol. 31(3), pages 492-499, September. https://doi.org/10.1016/j.jmacro.2008.07.003.
The authors when submitting their papers endorse and give permission as well to the Publisher Transition Academia Press to publish the article/paper in print and/or electronic format. Article/paper is defined as the final, definitive, and citable Version of Record, and includes the accepted manuscript in its final form, including the abstract, text, bibliography, and all accompanying tables, illustrations, data.
If/when an article is accepted for publication, Author will be asked to transfer copyright of the article to Transition Academia Press. Transition Academia Press will retain copyright of all published material and reserves the right to re-use any such material in any print and/or electronic format. Author willing to retain their copyright from the Editors might request a fair condition, on the base of a bilateral agreement.