Does Public Debt Hamper Economic Growth: Evidence From European Transitional Countries

Abstract

Lately, there has been an increased interest among policy makers and scholars regarding the nexus between public debt and economic growth, with emphasizes on its effects on transition economies, particularly after the last global financial crisis. This paper tries to investigate the impact of public debt on economic growth in the European transition economies, for the time spin 2000-2016, by using Pooled OLS, Fixed effects, Random effects and Hausman – Taylor Instrumental variable (IV). In addition, results reveal that public debt although has positive effect on per capita growth still is statistically insignificant, whereas debt square has negative effect on per capita GDP growth. Further, gross savings, final consumption and fixed capital formation have positive effect on per capita growth, while government expenditures do not show significant impact. Moreover, such results highlight important implications for fiscal policymakers in these countries in order to foster the economic growth in the context of public debt level.

The Effect of Public Debt on Private Consumption: The Case of Countries in Transition

“…Fixed investment with a positive statistically significant coefficient positively affects GDP per capita. However, the positive government spending ratiolaims a negligible effect on GDP per capita GDP (Sulejmani & Ademi, 2019).…”

“…The government should aim to cover the budget balance and national debt as much as possible, paying special attention to companies with significant tax risks, including state-owned companies and corporations, public-private partnerships, and pensions and health (Chitiga, 2014 ). Sulejmani and Ademi (2019) empirically analyse the effects of public debt on economic growth and the policies that influence economic growth in the European transition countries from 1996 to 2017. Given the attention of many scholars and the importance of politics to national debt and economic growth, we have empirically investigated the relationship of these two variables in European transition countries and based on our knowledge.…”