Does External Debt Stocks Have an Asymmetric Effect on Inflation Dynamics in Cameroon? An Application of Nonlinear ARDLL

Abstract

External debt is indispensable, especially in developing countries which usually face budget deficits to cover up their saving-investment gap. However, the effect of external debt on inflation depends on whether it is increasing or decreasing. Hence, this study aims to examine the effect of external debt stocks on inflation using World Bank data from 1980 to 2020 in Cameroon. The study makes use of non-linear ARDL to examine the positive and negative changes in external debt stocks and their effects on inflation. The results indicate a long-run increasing and decreasing asymmetry effect of external debts on inflation. Only the coefficient of positive external debt stock on inflation is positive and significant in the long run while in the short run, positive and negative external debt stocks respectively have a negative and positive significant impact on inflation. The study recommends that the government should be mindful of increasing external debt as it will become inflationary in the long run.

Asymmetric and Nonlinear Foreign Debt–Inflation Nexus in Brazil: Evidence from NARDL and Markov Regime Switching Approaches

“…These NARDL findings align with several empirical studies emphasizing asymmetric effects in adjusting economic variables, particularly regarding critical elements like debt and inflation. Noteworthy research endeavors, including studies by Enongene and Etape (2023) on Cameroon, on Sudan, and Aimola and Odhiambo (2022) on the Gambia, further substantiate and bolster these conclusions and support the asymmetric hypothesis which indicates that positive foreign debt shocks could have a different effect on inflation than negative debt shocks.…”

“…Recently, a growing number of studies have probed the intricate relationship between foreign debt and inflation using a variety of econometric methodologies and covering different countries and periods, with inconclusive findings. Notably, research conducted by Enongene and Etape (2023) in Cameroon, in Sudan, Gathendu (2021) in Kenya, Uganda, and Tanzania, and the collective work of Arisa (2020) and Mweni et al (2016) in Kenya, have explored this nuanced association. While a positive relationship between foreign debt and inflation is supported by some studies (e.g., Choong et al 2010;Mweni et al 2016;Arisa 2020), others indicate a negative relationship (e.g., Karakaplan 2009;, and a third category of studies asserts no discernible relationship (e.g., Essien et al 2016;Aimola and Odhiambo 2021b).…”