External public debt and economic growth: empirical evidence from Bangladesh, 1974 to 2010

Shah, Md. Mahmud Hasan and Pervin, Shahida (2012): External public debt and economic growth: empirical evidence from Bangladesh, 1974 to 2010. Published in: Academic Research International , Vol. 3, No. 2 (September 2012): pp. 508-515.

Abstract

This research paper investigates the relevance of the dependence of Bangladesh economy on external public debt. Using some econometric tools, the study is conducted to find out the effect of external public debt on economic growth from the perspective of Bangladesh economy for the period 1974 - 2010. The study will probe debt overhang and crowding out effect of external public debt to represent the effect. To specify the debt overhang and crowding out effect of external public debt, the debt burden has been segmented into two part; external debt stock and external debt service. Long run significant negative effect of external public debt service and positive effect of external public debt stock on GDP growth have been found from this investigation. In short run, only external debt service has negative effect but the debt stock does not have any significant effect. Thus the investigation did not find any evidence of debt overhang provided that there is no significant adverse effect of debt stock on GDP growth. But crowding out effect was originated from the fact that there is evidence of adverse effect of debt service payment on economic growth for the period. As more debt stock means more service payment, the study shows a dichotomy in obtained results. So the reconciliation of debt should be prudent to optimize the growth of Bangladesh. Short run disequilibrium in the path of long run is corrected at a good speed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Crowding out effect, cointegration, debt overhang, external public debt, error correction mechanism.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy

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