Debt Dynamics and Economic Growth

Idrees, Muhammad (2025): Debt Dynamics and Economic Growth.

Abstract

This paper assesses the impact of unanticipated shocks to public debt on Pakistan’s economic growth. Following the methodology of Soyres, Kawai, and Wang (2022), a series of forecast errors is constructed to serve as exogenous shocks in analyzing their effects on real GDP. Using data from 1994 to 2023, the analysis reveals that a 1.0 percent unanticipated increase in the debt-to-GDP ratio leads to a 0.14 percent decline in real GDP in the subsequent year. This negative impact highlights the need to identify a debt threshold beyond which economic growth is adversely affected. Applying threshold regression techniques, a critical debt threshold of 57 percent is estimated for Pakistan. The findings underscore the importance of gradual fiscal adjustments to place the debt-to-GDP ratio on a declining and sustainable path.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Policy, Public Debt, Economic Growth
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H6 - National Budget, Deficit, and Debt

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