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Public debt dynamics and nonlinear effects on economic growth : evidence from Rwanda

Rutayisire, J.Musoni (2021): Public debt dynamics and nonlinear effects on economic growth : evidence from Rwanda.

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Abstract

The purpose of this paper is to contribute to existing literature by investigating the nonlinear impact of public debt on economic growth, as well as the long and short run relationship between economic growth and its determinants in Rwanda. To this end, a quadratic polynomial function in debt and the autoregressive distributed lag (ARDL) bounds testing approach to co-integration have been employed for econometric analysis using time series data covering the period 1970- 2018. Following many other empirical studies, this research assumed that at lower level, public debt may be growth-enhancing, while at higher level, it is deleterious to growth. Therefore, this study attempted to assess whether in the case of Rwanda, there exists a threshold level or a turning point above which the impact of public debt on economic growth shifts from positive to negative. The empirical results of this study strongly suggest the presence of a concave nonlinear or an inverted U-shape relationship between public debt and economic growth in Rwanda. The turning point above which additional public debt becomes harmful to growth has been evaluated at a public debt-to-GDP ratio equal to 50.2%. This finding provides an empirical support to the public debt convergence policy benchmark of 50% adopted in Rwanda as well in the East African Economic Community member countries. This result would be useful for policy makers in the design of a well-informed macroeconomic and public debt management strategy.

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