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

Abstract

Developed countries have well-designed and developed economies in macroeconomic terms. However, not all countries benefit from the fruits of such an economy. Therefore, some countries are still faced with an economy that requires macroeconomic restructuring and development. People in these countries face high unemployment, evolving fiscal and monetary policies. The state is forced to borrow either internally or externally, where the latter is usually preferred. This paper aims to show the effects of government debt on private consumption with a particular focus on transition countries. Thereby explaining the factors that influence private consumption and the types of debt that governments take into account. The countries in regions, which are facing this problem, will be analysed in more detail. Kosovo is one such country, which will be analysed in detail, particularly the relationship between national debt and private consumption. This study is carried out using the statistical software STATA, whereby private consumption is a dependent variable, whilst national debt, gross fixed capital formation, foreign direct investment, consumer price index, export of goods and services and GDP growth are our independent variables. This paper is a compilation of information from multiple sources to describe the reality that transition countries are faced with when borrowing.