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Determinants of Public Debt for middle income and high income group countries using Panel Data regression

Sinha, Pankaj and Arora, Varun and Bansal, Vishakha (2011): Determinants of Public Debt for middle income and high income group countries using Panel Data regression.

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To be able to predict when a nation will go bust has been one of toughest challenges in macroeconomics. Considerable research and effort has been put into this direction but still we are not in a position to say anything with certainty. This paper analyzes panel pool data on 31 countries across the world for the past 30 years on the basis of which the possibility of a sovereign default can be explored. The aim of this study is to understand which all factors influence the public debt in middle and high income group countries using Panel regression. Total effects model, Cross section fixed effects model, Cross section random effects model have been used to understand the factors whereas Autoregressive multiple regression model has been used to forecast the debt figures. The research findings suggest that the most important determinant of debt situation is GDP growth rate for both high and middle income group countries. In addition to this, Central government expenditure, education expenditure and Current account balance are also seen to influence the debt situation for both groups. FDI and Inflation have no impact on debt to GDP ratios among high income group countries but are found to be of more relevance when determining debt situation of middle income group countries. Population density and population above 65 years of age do not have any impact whatsoever on debt to GDP ratios of high and middle income group countries. Forecasts for weighted average public debt for high income group countries indicate steady increase. Debt situation of countries including Switzerland, Korea, Slovak rep, France and Japan is likely to worsen over the next 5 years. The debt situation of Greece and Spain is unlikely to change much whereas Ireland, USA, Canada, Italy, Hungary are expected to get better till 2015.

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