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

Megersa, kelbesa (2014): The laffer curve and the debt-growth link in low-income Sub-Saharan African economies.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: public debt, economic growth, laffer curve, low-income countries, Sub-Saharan Africa
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; G - Financial Economics > G0 - General > G01 - Financial Crises; H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H6 - National Budget, Deficit, and Debt > H61 - Budget ; Budget Systems; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt; N - Economic History > N1 - Macroeconomics and Monetary Economics ; Industrial Structure ; Growth ; Fluctuations > N17 - Africa ; Oceania; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa; P - Economic Systems > P5 - Comparative Economic Systems > P52 - Comparative Studies of Particular Economies

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