Nonlinear Impact of Public Debt on Economic Growth: Evidence from Sub-Saharan African Countries

Koffi, Siméon (2019): Nonlinear Impact of Public Debt on Economic Growth: Evidence from Sub-Saharan African Countries.

Abstract

This paper empirically explores the impact of public debt on economic growth in Sub-Saharan African (SSA) countries over the period 1960 to 2015 by using a system Generalized Methods of Moments (s-GMM). Specifically, this work studies the nonlinear relationship between public debt and economic growth. To do so, we perform the Sasabuchi-Lind-Mehlum’s test (or U-test) to check if the required and sufficient conditions are met for an inverted U-shape. The results strongly suggest the presence of a nonlinear relationship between public debt and economic growth. By applying the Delta method, this threshold is evaluated at about 36.18 percent ratio debt-to-GDP with its confidence interval associated (13, 59). The public debt boosts the economic growth when its level is less than this turning point. Above this threshold, an increase in public debt would lower the economic growth. Accordingly, a re-examination of the public debt level of some convergence policies which set this level (debt-to-GDP ratio) to 70 per cent (cf. Boxes 1 and 2) is proposed.

• Item Type: MPRA Paper
• Language: English
• Keywords: s-GMM, U-test, Delta method.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance; N - Economic History > N4 - Government, War, Law, International Relations, and Regulation

References

[1] Arellano, M., and Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

[2] Barro, R. (1991). Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics, 106(2), 407-443.

[3] Baum, A., Checherita-Westphal, C.D., and Rother, P. (2012). Debt and Growth: New Evidence for the Euro Area. ECB Working Paper, No. 1450.

[4] Baum, C., Schaffer, M., and Stillman, S. (2003). Instrumental variables and GMM: Estimation and testing. Stata Journal, 3(1), 1-31.

[5] Baumol, W. (1986). Productivity Growth, Convergence and Welfare: What the Long-Run Data Show? American Economic Review, 76(5), 1072-1085.

[6] Blundell, R., and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.

[7] Caner, M., and Hansen, B. (2004). Instrumental Variable Estimation of a Threshold Model. Econometric Theory, 20(5), 813-843.

[8] Chang, T., and Chiang, G. (2012). Transitional behavior of Government Debt Ratio on Growth: The case of OECD countries. Journal for Economic Forecasting, 15(2), 24-37.

[9] Checherita, C., and Rother, P. (2010). The Impact of High Government Debt on Economic Growth and Its Channels: An Empirical Investigation for the Euro Area. European Economic Review, 56(7), 1392-1405.

[10] Egert, B. (2014). Public debt, Economic Growth and Nonlinear Effects: Myth or Reality? CESifo Working Paper No. 4157, Munich.

[11] Feenstra, R.C., Robert, I., and Marcel, P.T. (2015). The next Generation of the Penn World Table. American Economic Review, 105(10), 3150-3182.

[12] Glaeser, E.L., Rafael, L.P., Florencio, L., and Andrei, S. (2004). Do Institutions Cause Growth? Journal of Economic Growth, 9, 271-303.

[13] Grennes, T., Caner, M., and Koehler-Geib, F. (2010). Finding the Tipping Point: When Sovereign Debt Turns Bad. The World Bank Policy Research Working Paper No. 5391, Washington, DC.

[14] Habib, M., Mileva, E., and Stracca, L. (2016). The Real Exchange Rate and Economic Growth: Revisiting the Case Using External Instruments. ECB Working Paper, No. 1921.

[15] Hayek, F.A. (1966). Monetary Theory and the Trade Cycle. Sentry Press, New York.

[16] Islam, N. (1995). Growth Empirics: A Panel Data Approach. Quarterly Journal of Economics, 110(4), 1127-1170.

[17] Kumar, M., and Woo, J. (2010). Public Debt and Growth. IMF Working Paper No. 10/174, Washington (D.C.).

[18] Lind, J. T. and Mehlum, H. (2010). With or Without U? The Appropriate Test for a U-Shaped Relationship. Oxford Bulletin of Economics and Statistics, 72 (1), 109-118.

[19] Meade, J.E. (1958). Is the National Debt a Burden? Oxford Economic Papers, 10(2), 163-183.

[20] Minea, A., and Parent, A. (2012). Is High Public Debt always Harmful to Economic Growth? Reinhart and Rogoff and some Complex Nonlinearities. Working Paper, No. E2012.8. CERDI.

[21] Misztal, P. (2010). Public Debt and Economic Growth in the European Union. Journal of Applied Economic Sciences, 5(3), 292-302.

[22] Novaresi, N. (2001). Discipline budgétaire: Etude de l’influence du referendum financier et des règles d’équilibre budgétaire sur les finances publiques des vingt-six cantons suisses [Budget discipline: study of the influence of the financial referendum and the rules of budgetary balance on the public finances of the twenty-six Swiss cantons], Doctoral Thesis. University of Fribourg Switzerland, BENEFRI Centre d’études en économie du secteur public.

[23] Overseas Development Institute, ODI, (2017). ODI publications.

[24] Pattillo, C.A., Poirson, H., and Ricci, L.A. (2002). External Debt and Growth. IMF Working Paper, No. 02/69, Washington, DC.

[25] Pier, C.P., Urban, S., and Paul van den N. (2012). Avoiding debt traps: Fiscal consolidation, financial backstops and structural reforms. OECD Journal, Economic Studies, Vol. 2012/1.

[26] Presbitero, A. F. (2012). Total Public Debt and Growth in Developing Countries. European Journal of Development Research, 24(4), 606-626.

[27] Rao, C.R. (1973). Linear Inference and its Applications. John Wiley and Sons, New York.

[28] Reinhart, C.M., and Rogoff, K.S. (2010). Growth in A Time of Debt. American Economic Review, 100(2), 573-578.

[29] Roodman, D. (2006). How to do xtabond2: An introduction to Difference and System Gmm in Stata. Working Paper No. 103, Center for global development.

[30] Roodman, D. (2009). A note on the Theme of Too Many Instruments. Oxford Bulletin of Economics and Statistics, 71(1), 135-158.

[31] Sala-I-Martin, X., Doppelhofer, G., and Miller, R.I. (2004). Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach. American Economic Review, 94(4), 813-835.

[32] Schclarek, A. (2004). Debt and Economic Growth in Developing and industrial Countries. Working Paper. Department of Economics, Lund University, Sweden.

[33] Solow, R.M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65-94.

[34] Stiglitz, J., and Rashid, H. (2013, June 26). Sub-Saharan Africans Eurobond Borrowing Spree Gathers Pace: Why are an increasing Number of Developing Countries Resorting to Expensive sovereign-bond issues? The Guardian.

[35] Vranceanu, R., and Besencenot, D. (2013). The Spending Multiplier in a Time of Massive Public Debt: The Euro-area Case. Applied Economics Letters, 20(8), 758-762.

[36] Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics 126, 25-51.

[37] World Bank (2017). World Bank Database.