TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ - BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM

TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.TÁC ĐỘNG BẤT CÂN XỨNG CỦA NỢ CÔNG ĐẾN TĂNG TRƯỞNG KINH TẾ BẰNG CHỨNG THỰC NGHIỆM TỪ VIỆT NAM.

INTRODUCTION OFTHERESEARCH

THE RATIONALEOFRESEARCH

Post-financial crisis economic growth remains below average, with downward revisions in medium-term growth projections since 2011, reflecting uncertainty in the long-term economic outlook Concurrently, public debt-to-GDP ratios have surged in developing market economies, reaching unprecedented levels in some nations These factors raise questions about the interplay between fiscal policy and the economic growth cycle.

Fiscal policy (government spending, taxes, subsidies, etc.) and monetary policy (money supply, interest rates, exchange rates, etc.) are utilized by the government to intervene in the economy during periods of recession or rapid growth Those policies are separated into pro-cyclical and counter-cyclical stages based on the recession or economic growth cycle A pro-cyclical fiscal policy is defined as the policy aims to balance the government budget For instance, if there is a budget deficit, it is necessary to increase tax revenues and decrease government spending A fiscal strategy with the purpose of restoring output to its potential level is countercyclical To attain potential output levels during a recession, the government continues to increase government spending and cut tax receipts (Keynes,1936).

Governments in developed nations implement countercyclical fiscal policies by using automated stabilizing instruments During economic contractions, expansionary fiscal policies are employed to increase unemployment insurance and social transfer payments, while tax policy can mitigate the economic downturn by reducing tax collection Conversely, contractionary fiscal policies are implemented during economic expansions to curb inflation and promote economic stability This countercyclical approach aims to stabilize the economy by offsetting economic fluctuations and promoting sustained growth.

While macroeconomic policy in developed nations is primarily targeted at stabilizing the economic cycle, countercyclical fiscal policy is implemented to accumulate in the expansion period In developing nations, the macroeconomic policy is procyclical Those economies frequently increase investment and public spending throughout the recovery phase of the economy to catch up with developing nations The government, particularly the local authorities, desires to increase spending when the economy is expanding Developing nations frequently lack automatic stabilization instruments during economic recession For instance, unemployment insurance payouts are infrequent, and social transfers represent a negligible portion of the budget In developing nations, the majority of expenditures are comprised of government consumption and wages Additionally, indirect taxes (trade and consumption taxes) sometimes replace direct taxes in emerging countries (income taxes) In order for the government to achieve its long-term macroeconomic management objectives, it must employ fiscal policy effectively and at the appropriate moment during a recession or rapid economic expansion (Talvi and Vegh,2005).

Through the use of fiscal policy, the government intervenes to restore economic equilibrium An unfavorable impact on the economy can have both immediate and long-term repercussions if the wrong decision is made. Consequently, it is crucial to determine the most effective fiscal policy instruments required to support economic growth.

In order to fund global government budgets and promote economic growth, sustainable funding policies are needed Frequently, when tax collections fall short of projected government spending, there is no other option than to increase taxes or borrow money either domestically or internationally (Owusu-Nantwi and Erickson,

Public debt arises when governments borrow instead of taxing, supplementing insufficient public revenue for expenses (Ogunmuyiwa, 2011) This debt includes short- and long-term loans used to finance public expenditures Following the post-WWII economic crisis, many economies worldwide, both developed and emerging, resorted to borrowing to cover budget deficits, highlighting the prevalence of public debt as an alternative funding mechanism.

These efforts have led to the accumulation of public debt in many nations, causing economic recession and financial crises in the early 2000s in numerous developed and developing nations (Donayre and Taivan,2017).

The government uses the public debt as a key tool to finance national development The use of debt to finance expenditures that will ultimately increase productivity and stimulate the economy However, empirical research on public debt, such as those conducted by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014), indicate that public debt will have a negative effect on economic growth once it exceeds a particular threshold According to Mankiw (2013), the government expenditure deficit surpasses the self-accumulation that can be paid by domestic and international businesses Public debt encompasses both international and domestic obligations Rahman (2012) defines public debt as a circumstance in which the quantity of valuable documents possessed by the government is insufficient to compensate the deficiency in previous expenditures According to macroeconomic theory, a government debt utilized to pay spending in productive areas such as health, education, and nutrition will have a beneficial impact on economic growth (Freeman, & Webber 2009).

If the rate of return on government debt is higher than the rate at which the government receives paid for its services, then the country will gain from the debt incurred by the government, and vice versa Presently, rising national debt is a global phenomenon Total public debt has long been cited as a major subject of concern by both financial and monetary policymakers Public debt, particularly debt spending programs, plays a vital role in achieving rapid economic growth.According to Elmendorf and Mankiw (1999), debt can increase aggregate demand and output in the short term, but lower capital and output in the long term.Governments rely heavily on public debt to finance a nation's economic development Debt is utilized to fund expenditures that will ultimately increase productivity and stimulate economic growth Nonetheless, empirical research on public debt, such as those conducted by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014), indicate that public debt will have a negative effect on economicgrowthonceitbeyondacertainthresholdnumber.AccordingtoMankiw

Public debt occurs when government spending exceeds domestic and international revenue It includes both domestic and international borrowings Despite being a common practice, public debt can be seen as a situation where the value of government assets is insufficient to cover past expenditures (Rahman 2012) In macroeconomic theory, government debt used to finance productive investments in areas like healthcare, education, and nutrition can positively impact economic growth (Freeman & Webber 2009).

It is extremely difficult for a nation to create a budget surplus; hence, public debt is unavoidable (Adom, 2016) However, unsustainable levels of public debt might inhibit economic growth (Adom, 2016) Unsustainable public debt hinders economic growth by reducing a country's competitiveness and increasing its financial markets' sensitivity to international shocks (Cochrane, 2011a; Castro et al.,

2015) This also means that, while borrowing to support public spending is not necessarily a bad thing, it can have a negative influence on economic growth if it is not adequately controlled The 1970s and 1980s worldwide debt crises were triggered by weak debt management practices in low- and middle-income countries (Marquez, 2000) Due to a rise in short-term loans to finance long-term projects without the ability to meet debt commitments on time, debt collection and repayment have become a central concern for emerging and less developed countries (Marquez, 2000) There are still conflicting conclusions regarding how public debt affects economic growth, regardless of whether it rises or falls Others academics find a positive, some a negative, while others find no correlation between public debt and economic growth under different economic conditions According to economists, public debt is not a problem; rather, the issue is the debt's mismanagement Empirical evidence suggests that if adequate laws are in place and can be used to promote conditional lending, where aid is attached to policy reform,then aid will be successful On both the short- and long-term, the public debt has a significant impact on the economy (Kumar and Woo, 2010) The mismatch between theory and practice on the relationship between public debt and economicgrowth has also contributed to the disparities in policy approaches among the examined nations.

Vietnam's national debt is thought to be under control, although it may still pose a barrier to its ambitions for economic development High debt can significantly effect economic growth and development Thus, public debt has both beneficial and negative consequences on the economies of nations, causing several obstacles and difficulties High levels of debt might hinder economic growth and development This topic has always attracted a great deal of attention due to the difficulties involved in analyzing the challenges of economic growth and governmental debt The impact of government interventions on economic growth through debt, taxation, and spending continues to be an important subject of economic policy in the global economy Although the origins and effects of public debt on the economies of developing nations are still debatable, it is clear that public debt has a negative impact on economic growth Recent financial crises in both developed and developing nations, as well as vast disparities in economic growth rates among world economies, have led to a new link between public debt and economic growth The fact that Asian countries are the greatest borrowers among emerging economies means that the issue of rising public debt is a particularly critical issue in these countries This is because of the fact that Asian countries are located in the region with the most rapidly developing economy Asian economies also had two major crises during the time analyzed, the Asian financial crisis of 1998 and the global financial crisis of 2008 which boosted the public debt- to-GDP ratio in thesecountries.

Unlike other studies in the world, the relationship between public debt and economic growth is mainly carried out in developed countries or countries with a clearly recognized market economy Domestic studies mainly find thresholds or just stop analyzing the situation between public debt and economic growth However, the thesis selected Vietnam as the research sample, with the economic operating mechanism under the management of the state having many differences compared to other countries On the other hand, from theory and empirical studies, it is shown thatoverusingandmaintainingahighpublicdebtwillhavenegativeeffectsonthe economic growth of countries Therefore, the thesis does not search for thresholds but estimates the level of asymmetric impacts, including the specific positive and negative impacts of public debt on economic growth This topic's primary purpose is to evaluate the asymmetric influence of public debt on economic growth inVietnam based on the preceding practice and previous empirical research The study examines whether debt is a barrier to economic growth in Vietnam and how government loans affect the short- and long-term sustainability of the economy The findings of this study will provide empirical evidence regarding the impact of public debt on the sustainable growth of the Vietnameseeconomy.

RESEARCHOBJECTIVES

The purpose of this study is to examine the causal relationship between fiscal policies and economic cycles, serving as the basis to quantify the asymmetric impact of Vietnam's governmental debt on economic growth The conclusions of the asymmetric impact of public debt on economic growth serve as the foundation for recommending fiscal policies forVietnam.

To accomplish the objective, the research must address the following specific aims:

(1) Assessing the impact of fiscal policy determinants on economic growthin Vietnam

(2) Determine the impact of fiscal policy on Vietnam's economicexpansion.

(3) Examining the asymmetric impact of public debt on economic growthinVietnam.

(4) Analysing the effects and repercussions of the policy of public debt on the expansion of the Vietnameseeconomy.

To achieve the goals of this thesis, it is necessary to respond to the following questions:

(1) Does Vietnam's fiscal policy have a causal relationship with economic growth?

(2) What is the extent of fiscal policy's influence on economicexpansion?

(3) Does public debt have an asymmetric impact on economic growthinVietnam?

(4) How does an increase in public debt to a certain level have a negative impact on Vietnam's economicgrowth?

OBJECTS,SCOPEANDMETHODOLOGYOFTHERESEARCH

The study analyzes the impact of fiscal policy, represented by total tax revenue, government debt, and government spending, on Vietnam's economic growth from 2000 to 2021 Quarterly data from IMF financial statistics was transformed into logarithmic base natural form to account for non-normal distribution The research utilized GDP, monetary supply growth, lending rate, public debt, exchange rate, and government spending as variables to assess their relationship with economic growth.

After using the VECM model to test and estimate the relationship between fiscal policy and the business cycle of Vietnam, the research methods utilized are quantitative NARDL used an asymmetric regression model to examine the disproportionate effect of public debt on economic growth in Vietnam On this premise, the thesis makes proposals for the development of policies concerning Vietnam's national debt.

This thesis utilizes the VECM (Vector Error Correction Model) framework to evaluate the correlation between fiscal policy and the economic cycle The VECM model lacks the ability to differentiate between endogenous and exogenous factors, hence rendering it appropriate for examining the causal association between fiscal policy and the economic cycle throughout both the short and long term A crucialpr er eq uis it e f o r e m p l o y i n g t h e V e c t o r E r r o r C o r r e c t i o n M o d e l ( V

E C M ) i s that the data series must possess the same level of integration through differencing and exhibit cointegration The thesis employs the NARDL (Nonlinear Autoregressive Distributed Lag) model to investigate the asymmetric effects of public debt and the attributes of fiscal policy on economic growth, specifically in the context of the economic cycle in Vietnam This analysis is based on the observed level of causality between fiscal policy and the economic cycle.Thep r i m a r y r e q u i r e m e n t f o r u s i n g t h e N A R D L m o d e l i s t h a t t h e d a t a s e r i e s s h o u l d e x h i b i t i n t e g r a t i o n a t t h e m o s t e l e v a t e d l e v e l o f d i f f e r e n c i n g , s p e c i f i c a l l y o f o r d e r 1.

THESIGNIFICANEANDCONTRIBUTIONSOFTHERESEARCH

On the basis of theory and empirical studies on the influence of public debt on economic growth, as well as the current research gap, this study makes the following contributions and presents new points:

The relevance and theoretical contribution to science of the research

(1) The paper contributes to the application of theoretical foundationsonpublic debt and economic growth to the experience of Vietnam, a country whose economy is transitioning to the market mechanism and containing numerous problematic components Theoretical underpinnings are then applied to the research sample, which is either the group of industrialized countries or the group of developing countries The selection of Vietnam as a research sample will contribute to elucidating issues of scientific theory when applied to economies with distinct characteristics, such as Vietnam; whether or not the results are consistent with the theory and earlier empiricalstudies.

Contribution to empirical research, and practical importance

This study employs a new approach to assess the impact of public debt on economic growth in Vietnam, considering the limitations of domestic qualitative analysis and international linear or threshold approaches Incorporating the complexities of volatile and integrated real-world conditions, such as highly liberalized capital flows, fluctuating currency rates, and dynamic global economies, the model captures the asymmetric nature of this relationship under more realistic circumstances.

(3) This study contributes in two ways to the empirical evidence now accessible First, only a handful of empirical studies have examined the public debt- to-GDP ratio threshold and its impact on economic growth in developing and transitional nations like Vietnam Second, the theory has demonstrated thatVietnam's public debt has a asymmetric effect on economicgrowth.

RESEARCHCONTENTS

This research consists of five chapters:

Chapter 1: Introduction of The research In this part, the topic will clarify the overview contents of the research topic including: necessity of the research, research objectives, research questions, research object and scope, research methods and significance of the topic.

Chapter 2: Theories and Literature Review The relationship betweenfiscalpolicy and the economic cycle is discussed in Chapter 2 The topic will provide a summary of the theories and experiments underlying the connection between public debt and economic growth Regarding the theoretical literature, four schoolsofthought (Classical, Keynesian, Ricardian, and Modern Monetization) have presented varying explanations regarding the causal relationship between public debt and economicgrowth.

Chapter 3: Research Methodology The topic describes the research model, model variables, data used, and data processing procedures In the following chapter, the study uses the VECM model to test the relationship between fiscal policy and the economic cycle of Vietnam and the NARDL model to testtheasymmetric impact of public debt on Vietnam's economic growth.

Chapter 4: Research results and Discussion.On that basis, the study uses the

VECM model to test Vietnam's pro-cyclical fiscal policy A dynamic regression model with asymmetrical distribution lag (NARDL) is being used to investigate whether public debt has an asymmetrically negative influence on Vietnam's economic growth.

Chapter 5: Conclusions and Policy Implications Chapter 5 summarizes the results of Chapter 4 to answer the research questions In addition, the study also points out some policy implications of fiscal policy and economic growth inVietnam.

THEORIES ANDLITERATUREREVIEW

THEORIESOFFISCALPOLICYANDBUSINESSCYCLE

2.1.1 Conceptsrelevant to the research problems

Fiscal policy, a component of macroeconomic policy, aims to influence economic activity by adjusting government expenditures or taxation Its objectives include mobilizing financial resources for government expenses, promoting economic restructuring and sustainability, stabilizing market prices, and redistributing income among societal groups This policy tool enables governments to steer economic outcomes and address specific challenges faced by their economies.

Fiscal policy is disaggregated into government expenditure and revenue components to measure their effect on real GDP growth Government spending and/ or tax adjustments are examples of fiscal policy's macroeconomic effects on economic activity Mobilizing financial resources to meet the state's spending needs; promoting economic restructuring, ensuring stable and sustainable economic growth; contributing to market and commodity price stabilization; and redistribution of social income between classes of the population are the objectives of fiscal policy (Furceri and Jalles,2016).

The government intervenes in the economy via fiscal policy (government spending, taxes, subsidies, etc.) and monetary policy (money supply, interest rates,exchange rates, etc.) during periods of economic recession or rapid growth.According to the recession or economic growth cycle, fiscal and monetary policy are split into procyclical and countercyclical stages Pro-cyclical fiscal policy is a fiscal policy that seeks to balance the budget To balance the budget when there is a deficit, it is important to increase tax collection and reduce government spending A countercyclical fiscal policy is a policy with the objective of restoring output to its potential level In order to achieve potential output levels during a recession,the government continues to raise government spending and decrease tax receipts (Keynes, 1936).

In developed nations, governments frequently employ a countercyclical fiscal strategy, i.e an expansionary fiscal policy while the economy is in recession and a contractionary fiscal policy when the economy is in expansion The fiscal policies of developed nations are countercyclical because of automated stabilizing instruments When unemployment is high, unemployment insurance and social transfer payments are increased As declining personal income reduces government tax collection, tax policy can potentially reverse the cycle While the economy exhibits signals of contraction, expansionary fiscal policy is enacted (Acemoglu et al, 2013; Fatas and Mihov, 2013).

While the primary objective of macroeconomic policy in developed countries is to stabilize the economic cycle, countercyclical fiscal policy is implemented to accumulate during the expansion phase In contrast, developing country macroeconomic policy is pro-cyclical The fundamental reason is that, in order to catch up with developed countries, emerging economies frequently increase investment and public spending, particularly when the economy is recovering. When the economy is expanding, the government, particularly the local government, desires to increase spending During economic downturns, developing nations frequently lack automated stabilization instruments Unemployment insurance payouts are infrequent, and social transfers represent a negligible portion of the budget The majority of spending in developing nations is allocated to government consumption and wages In emerging nations, indirect taxes (trade and consumption taxes) frequently replace direct taxes (income taxes) In order to achieve its long-term macroeconomic management objectives, the government must employ fiscal policy effectively and at the appropriate moment during a recession or rapid economic expansion Vegh and Talvi,2005).

2.1.1.2 The concept of the BusinessCycle

The business cycle explains the expansion and contraction of an economy.The economic cycle is the economy's response to real shocks, such as technological advancements, natural disasters, and conflict Negative or positive economic fluctuations can spread and generate cycle fluctuations (Kydland & Edward, 1982).

In the past two decades, the majority of nations have experienced economic cyclicality as a result of the 1997 and 2008 financial crises In reality, economic cycles are unpredictable and erratic There is no formula or approach for predicting the time and duration of business cycles with precision Governments continue to explore whether fiscal and monetary policy measures will be deployed to regulate the economy more steadily, and research into the economic cycle is conducted in an effort to limit economic crises and overheating.

The economic cycle is the result of market fluctuations, which cause the economy to experience recessionary peaks and troughs The response of fiscal and monetary policy to economic shocks has a significant impact on the subsequent evolution of the economy (Keynes, 1936).

2.1.2 Theoriesof Fiscal Policy and BusinessCycle

According to Keynesian theory, prices or wages represent instantaneous price adjustments that are not fully responsive to fluctuations in demand theWiththe support of the Countercyclical fiscal policy, the economy can recover from recessions and expansions more swiftly and smoothly Consequently, fiscal policy should actively smooth and support the business cycle by decreasing taxes and increasing spending, thereby increasing aggregate demand in downward stage, and by reducing spending and increasing savings in upward stage Although this is perhaps less relevant for developing countries, where social safety is less developed (Thornton, 2008).

From a neoclassical perspective, the objective of fiscal policy should be to minimize deviations Barro's (1979) hypothesis states that in order to assure that spending shocks or tax shocks are transitory, tax rates must be maintained at constant levels throughout the business cycle Therefore, the budget balance should have a positive correlation with output, given that it absorbs changes to tax revenues induced by tax shocks as well as changes to other incomes and expenditures (Fatás and Mihov, 2009, Chari et al., 1994).

Keynes (1936) claimed that relying entirely on the private sector would not generate sufficient savings for economic development in developing countries. Therefore, Keynesian economists have been urging low-income developing countries (LDCs) for a considerable amount of time to raise their tax burdens and reduce their recurrent spending in order to boost their savings in the government budget In addition, they encourage the governments of developing nations to enhance their public investments funded by foreign loans These policies were prevalent in the 1960s, 1970s, and 1980s in developing countries.However, there are a number of problems with these policy recommendations, including a lack of specificity in analyzing the relationship between macroeconomic variables and a disregard for fundamental features of fiscal policy, such as the efficient allocation of financial resources, equitable distribution, and long-term stability, while placing an excessive emphasis on short-term growth objectives The Keynesian theory disregards the fact that the government cannot inject purchasing power into the economy prior to diminishing it via taxes and debt The Keynesian hypothesis was questioned when the global economy entered a recession in the 1970s and when tax cuts and austerity spending led to an economic boom in the1980s.

Keynesian economic theory advocates for government intervention through increased taxation and public expenditure to address economic downturns and unemployment Government expenditure serves as a fiscal stimulus, boosting aggregate demand by injecting additional funds into the economy However, this spending is financed through taxation (reducing consumption and corporate profits) or borrowing (leading to potential budget deficits and increased national debt) These measures may have long-term negative consequences, including hindered business conditions and reduced productivity, further exacerbating the economic crisis.

To promote demand, taxes must be lowered, but tax cuts produce budget deficits andreducegovernmentspending;ifgovernmentspendingrises,themarginal efficiency of capital is likely to decline It also creates inflation and increases the budget's debt burden (Dinh Van Thong, 2009).

Contrary to the Keynesian perspective, many economists believed for decades that reducing the budget deficitwasthe "magic elixir" for economic expansion They contend that reducing government expenditure will reduce the budget deficit, hence lowering interest rates, increasing investment, boosting productivity, and ultimately promoting economic growth If the relationship between the aforementioned factors is close, this argument is valid and fiscal policy should focus on addressing the deficit problem There are, however, reasons to believe that the relationship between budget deficit, interest rate, investment, and growth is exaggerated However, neither school stresses the magnitude of budget expenditures Keynesian economists are normally concerned with big quantities of government expenditure, but they are also unconcerned with little amounts of government spending so long as they can be increased as necessary to rescue the stagnation economy Today, the majority of economists concur that there are situations in which government spending cuts are advantageous to economic growth, as well as situations in which government expenditure increases are favorable to economic growth In the 1930s and 1960s, ideas of market failure led to the establishment of enormous government spending programs underthef r a m e w o r k o f f i s c a l p o l i c y H o w e v e r , i n t h e

The most ideal form, according to current contempotary economic theory,isa mixed economy with a balanced role for the government and the market (Mankiw,

2005) The government manages the market using tax, expenditure, and regulatory programsw it hi na mar ke t e c o n o m y m o d e l th at de c i d es p ri cesa nd o u t p u t M a r k e t and Government are both decisive variables Managing the economy without government and the market is like to "clapping with one hand." The market economy increases the efficiency of production and distribution of products, but it also has drawbacks that necessitate government intervention to assure efficiency, fairness, and stability The endogenous growth model has become an essential theoretical foundation for contemporary fiscal policy (Barro, 1979) This theory posits that fiscal policy has both short-term and long-term effects on economic growth and social problems, similar to Keynesian theory In practice, it is difficult to distinguish between fiscal policy's short-term and long-term consequences, as well as whether effects are more permanent By adopting this framework, the government can make informed and nuanced economic adjustments through the use of fiscal policy The "visible hand" of the State and the "invisible hand" of the market are harmoniously combined in fiscal policy, which is based on Keynesian philosophy but is more logically finished How much tax revenue the state should collect to guarantee equity and maximize incentive, how much of that revenue should be used to address market flaws and how much should be used to highlight the sector's strengths: these are all questions that need answers A more dynamic and adaptable perspective of the budget's revenue and expense balance is revealed(Dinh Van Thong, 2009).

THEORETICALOFPUBLICDEBTANDECONOMICGROWTH

Taxes, duties, fees, revenue, property and business revenues, taxes, and fines are just a few examples of the public revenue sources that frequently support public spending However, the state faces a public budget deficit due to causes such as large infrastructure investments, war, financial development, natural disasters, the economic crisis, the budget deficit, and ordinary public spending To overcome this situation, public sector borrowing is mentioned.

Public debt, often known as state debt, is the legal responsibility of the state to repay borrowed funds, including principal and interest, to lenders on a set schedule Public debt may be incurred for various reasons, such as infrastructure projects or war expenses, but its accumulation should be controlled to avoid excessive borrowing After World War II, public debt surged to aid in the reconstruction of war-ravaged economies Additionally, the financial requirements of developing countries have contributed to increased borrowing International organizations like the IMF and World Bank have expanded the scope of borrowing beyond transnational arrangements.

According to the World Bank Report of 2015, the term "public debt" encompasses the entirety of the government's explicit, time-bound contractual obligations that remain unfulfilled beyond a designated deadline The composition of liabilities encompasses both domestic and international components, including loans, cash holdings, and securities tied to currencies.

In the process of globalization, capital mobility is increasing,andincreasingly fierce financial competition has appeared in the global market In particular, developing countries have sought to use public debt to finance development by attracting international short-term capital flows to their countries through various incentive instruments (such as low taxes, low interest rates, etc.) However, both the sudden fluctuations in capital flows and the incentive mechanisms deployed have dragged developing countries into a spiral of external debt Borrowing can be spent irresponsibly because it is an easy income, thereby causing a downturn in the performance of the economy Capital is wasted, and the debt burden is passed on to future generations due to inefficient public spending (Sugửzỹ,2010).

2.2.2 Classicaltheories of public debt and economicgrowth

The founder of classical economics, Ricardo (1817), stated that public debt tends to cause countries to be unclear about their actual condition, which in turn leads to irrational public spending This concept holds that paper wealth stimulates consumer demand, tightens investment, and slows capital and consumer goods expansion Classical economic theorists claim that debt-financed governmental spending does not entirely offset the negative consequences of crowding out private investment, resulting in a slowdown of the economy Thus, government borrowing from the domestic market induces a liquidity crisis and a spike in interest rates, which discourages private investment.

Ricardo contends that regardless of debt equity financing or tax hikes, the overall economic level has a lasting effect on demand According to the hypothesis, if taxes were to be raised, debt could be repaid, and people's income would rise as a result of their purchase of government-issued bonds Ricardo explains further that when the government lowers taxes and decides to finance its budget deficit through the issuance of bonds, households are often sensitive to increased consumption because they believe the government will raise taxes in the future to repay the debt; as a result, the debt has a long-lasting effect on economic growth Public debt hinders economic growth, according to the classical school of thinking, because it decreases both the fiscal discipline of the budgeting process and the private sector's access to credit (Broner et al., 2014) In addition, they argue that the repayment of public debt, which is often foreign debt, hinders economic growth by discouraging private investment and potential foreign investors.

Changes in government expenditure and the resulting increase in thepublicdebt are mirrored by changes in private saving, therefore they have no impact on actual economic development As Ricardo (1817/1951) noted, the real economy is not dependent on the government's option to increase revenue, such as through taxation or debt issuance, in certain circumstances "The Financing System" and "On the Principles of Political Economy and Taxation" were Ricardo's 1820 and 1877 works on public debt's effects on resource allocation and economic growth, respectively In the 20th century, Barro (1974) and Buchanan (1976) popularized Ricardo's position in their articles titled "Are government bonds a net asset?" and "Is public debt comparable to taxes?" Barro and Buchanan's theoretical and empirical contributions led to what is now known as the Barro-RicardoE q u i v a l e n c e

The Ricardian Equivalence Hypothesis (REH) suggests that government debt has no negative economic effects as long as solvency is maintained REH proponents, such as Barro (1989) and Buchanan (1976), believe that government debt only affects financial decisions among economic agents They argue that changes in public debt do not impact major macroeconomic variables like investment and production, and therefore have no effect on economic growth.

In the neoclassical perspective, expansionary fiscal policies do not alter economic performance (Barro, 1976; Pereira & Rodrigues, 2001) Thus, the Barro-Ricardo Equivalence Theory contends that government debt cannot be employed as an economic stimulant (Barro,1989).

Six assumptions form the theoretical foundation of Ricardo's work The first is a perfect capital market, a credit climate that permits market participants to borrow freely The second assumption is that the growth rate of the population, in this case taxpayers, remains constant Third, both economic agents and consumption decisions are rational The fourth hypothesis is transfer between generations The fifth assumption holds that the future tax burden on government debt will provide all services to those who benefited from the first tax cut The sixth hypothesis concludes that there are no outstanding taxes (Barro, 1974, 1989; Buchanan, 1987). Therefore, according to the arguments of Barro (1974, 1989), a changeingovernment funding strategy will be met by an equal adjustment in private saving to offset changes in public saving (Elmendorf & Mankiw,1999).

According to the Keynesian perspective, public debt grows when circumstances require the government to incur substantial deficit spending.According to Keynesianism, excessive public debt is not a problem because the expense of public debt is covered by the higher interest revenue that the public obtains from holding public debt Keynes opposed any effort aimed at decreasing or merely halting the growth of debt According to Keynes' theory, government debt encourages job growth, which lowers unemployment and boosts participation. Public expenditures supported by debt have an additive effect, resulting in a multiplier effect that is beneficial for national output or income.

Keynesian economic theories assert that governmental debt limits the availability of capital from private investors, but has no effect on consumption because borrowed funds are reinvested to enhance overall demand through wages, wages, and other capital expenditures As a result, Keynesian economic theorists disregarded the difficulty of paying budget deficits through an increase intaxrevenues or government borrowing In practice, however, taxpayers feel the tax burden when the government boosts tax rates to collect income to offset the growing debt Additionally, in order to reduce their tax burden, taxpayers will find ways to reduce their employment and savings This causes the government to hike tax rates further, and so on, until the taxpayer discovers a way to avoid paying taxes The decline in the ratio between after-tax wages and profits reduces national income and savings In addition, an increase in interest income in the majority of nations will push the taxable personal income of many households into a highertaxband, particularly in nations with significantly raised tax rates Another flaw of this perspective is that it grossly underestimates the economic advantages obtained or lost as a result of the issuance of publicdebt.

Excessive debt refers to a scenario in which the debt is asymmetrically greater than the revenues created by new investment projects to service existing debts Therefore, profitability cannot decrease the amount of debt or improve the firm's worth (Myers, 1977) When sovereign governments gain from their debt,Krugman (1988, 1989) and Sachs (1989) argue that a high level of debt suggests an increase in predicted future tax rates Therefore, the over-indebtedness theory asserts that a country's debt will exceed its ability to pay It is anticipated that debt costs will hinder foreign and domestic investments In fact, the predicted rate of return on effective investment projects is insufficient to stimulate economic growth(Krugman, 1988) In addition, Claessens (1990) and Clements et al (2003) argue thatoutstandingloansrepresentacircumstanceinwhichtheilliquidityimpact,the discouraging effect, or both are substantial enough to hinder economic growth. Additionally, due to the uncertainty of private investors, the accumulation of debt hampers economic growth Because an increase in the money supply results in an increase in government debt and a reduction in future tax revenues, governments must address immediate needs.

2.2.3 Neoclassical theories of public debt and economicgrowth

Since the 1960s, neoclassical economists have observed that higher taxes to cover interest payments on the nation's expanding domestic and international debt had a detrimental impact on capital development High and rising public debt negatively impacts economic growth through a number of channels, including: (1) the dominance of private investment as government borrowing competes for capital on the nation's capital markets; (2) higher long-term interest rates caused by the supply of government debt and larger credit risk premiums; (3) the imposition of more distortionary taxes to finance future liabilities and increased repayments; and

(4) an increase in the inflation rate.

The short-term link between debt and growth may be favorable due to the impact of investment spending on growth, however the long-term relationshipmayb e n e g a t i v e d u e t o t h e h i g h r i s k p r e m i u m a s s o c i a t e d w i t h h i g h p u b l i c d e b t , h e n c e i n c r e a s i n g t h e c o s t o f d e b t F o r t h e n e g a t i v e c o r r e l a t i o n b e t w e e n d e b t a n d g r o w t h a s a r e s u l t o f c o u n t e r c y c l i c a l f i s c a l p o l i c y ; t h i s i m p l i e s t h a t g o v e r n m e n t s i n r e c e s s i o n s h o u l d u n d e r t a k e e x p a n s i o n a r y f i s c a l p o l i c i e s t o s t i m u l a t e g r o w t h a n d r e s t r i c t i v e p o l i c i e s t o l o w e r d e b t l e v e l s i n t h e i n t e r i m

Post-war redistribution has drawn attention to the intergenerational impact of debt The burden of public debt is effectively transferred from current taxpayers to future generations, who will bear the responsibility of repaying it through taxation This concept underlies the debate on intergenerational equity, raising concerns about the potential consequences of excessive debt accumulation for future generations' economic well-being and opportunities.

Ricardian neutrality argue that the existence of an active intergenerational debt burden is crucial to the possibility of debt neutrality As a result, a discussion arose

Public debt/GDP ratio Nonlinear threshold regarding the modelling of the effects of fiscal policy, particularly debt swaps, as well as their impact on social utility and interest rates.

RELEVANT EMPIRICAL STUDIES ON THE RELATIONSHIP BETWEENFISCALPOLICYANDTHEBUSINESSCYCLE

Gavin and Perotti (1997) concluded that fiscal policy in 13 Latin American countries from 1968 to 1995 was pro-cyclical The authors stated that the fiscal policy of developing nations is the polar opposite of that of developed countries. The cyclical metric increases the government's budget surplus by 0.25 percent for every one percent of GDP growth during periods of economic expansion During a recession, both the deficit and the gross domestic product decrease by 1 percent As a result of procyclical fiscal policies during periods of sluggish economic growth,these nations suffered severe economic losses The study also explains why the pro- cyclical fiscal policy operation of these countries is associated with the "greedy effect," which causes political distortions when political interest groups make more spendingdecisionswhiletheeconomyisbooming.IlzetzkiandVegh(2008) studied the cyclical effects of fiscal policy on the business cycle, as well as the reverse causality between them by using a variety of econometric models For the sample of developing countries selected by the two researchers, the GMM regression determines that fiscal policy has a pro-cyclical character Similarly, Lane

(1998) has shown that Irish fiscal policy ispro-cyclical.

Talvi and Végh (2005) conclude that the procyclicality of fiscal policy is prevalent in all 36 developing countries in their sample, and not just in Latin America The study demonstrates a positive association between the composition of government expenditures and GDP for a sample of 36 emerging nations (with a mean coefficient of 0.53) Thornton (2008) discovered in an analysis of 37 African nations between 1960 and 2004 that the real government consumption in 32 of these nations is procyclical to output changes Manasse (2006), who generates cyclical estimates by means of nonlinear techniques, issues a warning Find the observed disparities in the economic cyclicality of fiscal policy between developing and developed nations, which are in part attributable to the greater severity of economic shocks in developing nations.

Kaminsky and Végh (2004) analyzed the cyclicality of capital flows, fiscal policy, and monetary policy in 104 countries from 1960 to 2003 and reached the following conclusions: (1) Capital flows are a procyclical input in OECD and emerging nations; (2) Fiscal and monetary policy are procyclical for the majority of developing nations, with the effect being most prominent in upper middle-income nations For OECD countries, monetary policy is countercyclical; (3) In developing countries, the capital flow cycle and the macroeconomic cycle are mutually reinforcing, with the capital inflow period associated with expansionary macroeconomic policy and the capital outflow period associated with contractionary policy.

Fiscal policy is a popular topic choice for empirical studies The economic cyclicality of fiscal policy is widely accepted in developing nations Stein et al.

(1999) discovered a correlation coefficient of 0.52 between public consumption and economic growth in 26 Latin American nations from 1970 to 1995 Talvi andCarlosVegh(2005)foundthatpublicconsumptioniscyclicalacross36developing nations from Asia, Africa, the Middle East, and Latin America, with a correlation coefficient of 0.53 Kaminsky et al (2004) investigated the fiscal policy of developing nations A small sample of 83 low- and middle-income countries demonstrates that fiscal policy is procyclical This also yields comparable outcomes to Akitoby et al (2004).

The fiscal policy trend in developing nations and numerous emerging economies is pro-cyclical Studies have shown potential causes of procyclicality, including institutional weakness, social friction, and a loss in creditworthiness on international credit markets (Alesina and Tabellini, 2008) Research shows that corruption and democracy are the most important factors that affect cyclicality in developing countries The coefficients for the role of net external debt and social inequality as measured by the GINI index tend to oscillate around the 10% significance threshold Thus, institutional difficulties are the primary reason for cyclical fiscal policy (Halland and Bleaney, 2011).

The relationship between the economic cycle and fiscal policy has been the subject of numerous other hypotheses, particularly those that focus on the distinctions between developed and developing nations Essential explanations have been proposed: i) constraints on access to local and foreign credit markets (Caballero and Khrisnamurthy, 2004; Gavin and Perotti, 1997; Calderón and Schmidt-Hebbel, 2008) ii) political structures or organizations (Lane, 2003; Talvi and Végh, 2005; Alesina et al., 2008); And iii) wealth disparity polarization (Woo, 2009).

Alessia and Tabellini's (2008) research suggests that corruption in democracies leads to pro-cyclical fiscal policies When corruption is high, voters fear that economic gains will be misappropriated for political reasons Consequently, they demand increased public goods and tax cuts during economic booms This behavior results in a procyclical fiscal policy, where government spending and borrowing increase during economic expansions and decrease during downturns.

Furthermore, the study demonstrates that procyclical fiscal policy is more prominent in economies with high levels of corruption In a circumstance in which voters perceive the state of the economy but are unable to verify the amount of government income collected by the state bureaucracy The majority of budget surpluses are expected to be spent on plundered funds by voters rather than going toward the nation's savings In order to "grab as much of the pie" as possible, voters urge for increased expenditure (tax cuts, higher government spending, or transfers) in favorable times This public pressure compels the government to spend in accordance with the business cycle and to even borrow more money The empirical findings support the premise that countries with a greater prevalence of corruption have fiscal policies that are more pro-cyclical In addition, they uncover evidence that pro-cyclical fiscal policy is most prevalent in democraciesandcorruption, where high levels of corruption are associated with high levels of voter accountability. They discover that the confluence of democracy and corruption is more likely to result in pro-cyclical fiscal policy; they ascribe this to democratic pressure on government expenditure to prevent them from being usurped by corruption.

Some theories of the procyclical character of fiscal policy in developing countries contend that developing countries confront credit limits that prevent them from borrowing during economic downturns, and that they were forced to service their obligations during that time, prompting a contractionary fiscal policy when economic growth weakened The credit constraint theory states that developing countries are less likely to smooth the business cycle due to their inability to borrow from international credit markets during economic downturns Gavin and Perotti initially suggested this explanation (1997) According to their research, fiscal cyclicality in Latin America is particularly severe during economic downturns In addition, they find that the IMF's fund accessibility to emergency finance is greater during these periods and that the initial fiscal deficit defines the procyclicality of fiscal policy They interpret the data as evidence that investors limit financing to nations where they fear that high fiscal deficits could become unmanageable.Aghion et al (2014) examine the extent to which enterprises have recourse to external loans to finance company expenses This impacts the economy's ability to recover from a recession by fostering their long-term growth through enhanced productivity and project development Suzuki (2015) demonstrates that pro-cyclical fiscal policy arises due to inefficiencies in the credit market Nonetheless, political economy issues might also explain the reasoning behind cyclical fiscal policy. According to Kaminsky et al (2004), developing countries tend to execute a cyclical fiscal strategy, whereas industrialized countries follow an anticyclical model They contend that the inadequacy of international credit markets is the primary cause of cyclical fiscal policy During economic downturns, capital supply is hindered by flaws in the international credit market Therefore, countries cannot stimulate their economies during recessions, and cyclical fiscal policy is the government's only option These findings are in accordance with the conclusion that when a country loses access to global financial markets, capital inflows into developing economies "suddenly stop" and are accompanied by dramatic decreases in real prices, failed investments, and fiscal austeritymeasures.

Financial openness, as measured by the external debt to GDP ratio, positively influences fiscal policy's ability to mitigate economic fluctuations Access to domestic and international capital markets enables flexible fiscal policies (Calderón & Schmidt-Hebbel, 2008) However, excessive cyclical fiscal policy can hinder long-term growth, especially in countries with limited financial intermediation (Aghion & Marinescu, 2008), creating potential vulnerabilities (Stoian et al., 2018).

(2004) contend that inadequate financial depth, as measured by domestic loans to the private sector and homogeneity in financial asset class, impedes the execution of fiscal policy against the business cycle Due to a lack of fiscal depth or capital supply from both the private and governmental sectors, cyclical fiscal policy is prominent in developing nations Thus, there will not be sufficient capital injections to support the economy during a recession As a result of tardy fiscal adjustments,governments inhibited investment during the boom The business cycle is not only affected by credit market defects at the nationallevel.

Abbott and Jones (2013) examine the cyclicality of public expenditures as a proxy for OECD fiscal policy They contend that the responsiveness of public spending to fluctuations in the economic cycle is contingent on the degree of political polarization and the limits of government debt In addition, they discover that cyclicality is not limited to the government's aggregate consumption Due to political tensions in the distribution of political power, sub-central government expenditures and inter-government transfers may be more cyclical than central government expenditures Stoian et al (2018) established a framework for assessing the fiscal risk of 28 EU countries from 1990 to 2013 The data indicate that the Czech Republic, Greece, France, Italy, Malta, Portugal, and the United Kingdom have the greatest coefficients of financial vulnerability over the period studied. Eyraud et al (2017) evaluated fiscal procyclicality, excessive deficits, erroneous budget structures, and poor adherence to government budget rules in a sample of 19 euro area nations over a period of 16 years Lewis (2009) employed time series analysis to investigate the cyclicality, inertia, and effects of EU membership on the fiscal policies of Central and Eastern European nations The results indicate that the budget balances respond to stabilizing economic activity, are less stable than those of Western Europe, and that beginning in 1999, the EU membership process creates financial losses for countries in this region.

Many researches have provided evidence for the hypothesis that political variables contribute to the procyclicality of fiscal policy Talvi and Vegh (2005) record the adoption of cyclical fiscal policy in emerging nations, which is mostly due to policy distortions In their model for achieving a budget surplus, the application of tax reduction measures is detrimental to developing nations since the tax base in developing nations is highly volatile Consequently, the government should pursue a fiscal policy that is opposite to the business cycle Large changes in fiscal income are the cause of cyclical fiscal policy, as these oscillations are a result of political dynamics These authors argue that the political pressure to spend the budget surplus grows convexly as the surplus grows The political pressure to spend is considerable during times of volatility when there are significant variations in the tax base, as is frequently the case in developing nations As a result, fiscal policy is more procyclical when there are significant tax base movements Because there are fewer savings to smooth out the business cycle during bad economic times due to the low latent propensity to save, fiscal policy tends to be more cyclical during good economic times Calderón and Schmidt-Hebbel (2008) demonstrated that themodelpredicts a positive correlation between output volatility and fiscal policy, as highly variable output results in highly volatile tax volatility Alesina et al.

(2008) concur that credit-constrained nations can result in a bias for cyclical fiscal policy; nonetheless, credit limitations are indicative of weak political institutions. Budget restrictions during economic downturns indicate potential market developments Consequently, the nation's capacity to obtain financing on the market would be hampered Even if governments have access to funds, their borrowing costs will be unreasonably high, preventing them from stimulating the economy when it is most needed.

Political dynamics and the quality of political governance appear to be the primary determinants of fiscal policy cyclicity in developing nations Few studies have examined the relationship between political factors such as political regime and the quality of political institutions in regulating fiscal policy's responsiveness to the business cycle In addition to political considerations, Calderón et al (2016) contend that the responsiveness of fiscal policy to the volatility of the business cycle is largely contingent on the quality of institutions Both developed and developing economies with more developed political structures are more likely to pursue anticyclical rather than procyclical macroeconomic policies Ilzetzki and Végh

LITERATURE REVIEW BETWEEN PUBLIC DEBT AND ECONOMICGROWTH

Despite the extensive research on public debt's impact on economic growth, findings remain inconclusive Some studies suggest that high public debt can hinder growth, while others indicate that it may stimulate it This inconsistency highlights the need for further research to determine the precise relationship between public debt and economic growth.

2.4.1 Literaturereview of the negative impact of public debt on economic growth

Several research, including Reinhart and Rogoff (2010, 2012), Mohd et al., (2013); Choong et al., (2010); Abu and Hassan, have proven the association between government debt and economic growth (2008) External debt negatively impacts economic growth, according to Reinhart and Rogoff (2010, 2012), Chong et al (2010), and Mohd et al (2013) Empirical research on the relationship between government debt and economic growth, such as Diamond (1965), found that government debt restricts individuals' access to their savings and capital reserves.AdamandBevan (2005),Saint-Paul (1992),and Aizenmanetal.(2007) establish a negative correlation between government debt and economic growth. These studies include Gómez-Puig and Sosvilla-Rivero (2015; 2017), Ahlborn and Schweickert (2016), Panizza and Presbitero (2013), Szabo (2013), Égert (2012), Afonso and Jalles (2011), Cochrane (2011a, 2011b), Kumar and Woo (2010), International Monetary Fund (2005), Clements et al (2003).

Between 1961 and 2013, Gómez-Puig and Sosvilla-Rivero (2017) evaluated the long-term relationships between public debt and GDP growth rates in both EU countries; Using an autoregressive distributional delay (ARDL) model, an empirical technique on annual data, the authors conclude that public debt has a negative impact on the long-term GDP growth rates of euro area member states.

While examining the relationship between public debt and GDP growth using a sample of 111 OECD and developing countries over eight five-year periods from 1970 to 2010, Ahlborn and Schweickert (2016) came to the conclusion that the link between public debt and GDP growth varies significantly between countries due to the fiscal efficiency of each economic system Using a range of statistical techniques, including time-fixed effects, ordinary least squares (OLS), and two- stage combined least squares random effects, Ahlborn and Schweickert (2016) found that public debt has a significant negative impact on GDP growthrates.

According to Yeasmin and Chowdhury (2014), in Bangladesh, debt has a major negative impact on economic growth The external debt servicing load in Bangladesh retards GDP growth by 1.3% If considerable reductions in foreign debt are anticipated, Clements et al (2003) show that the growth of per capita income in highly indebted poor countries (HIPCs) will increase by around 1 percentage point per year Babu et al (2014) found that external debt has a considerable negative influence on GDP per capita growth in the East African Community (EAC) Malik et al (2010) predict that economic growth will decline as external debt increases.Using the instrumental variable technique, Panizza and Presbitero (2013) examined the effect of public debt, as a ratio of public debt to GDP, on real GDP per capita growth in a sample of OECD nations In all analyzed economies, Panizzaand

Presbitero (2013) find a negative association between the public debt-to-GDP ratio and real per capita GDP growth.

Szabo's (2013) study analyzed the impact of public debt-to-GDP ratio on economic growth in 27 EU countries Employing a linear regression model, he found a negative short-term relationship between public debt and GDP growth This suggests that increases in public debt can hinder economic expansion in the immediate term However, Szabo's findings indicate that this negative effect diminishes over time, as the long-term impact of public debt on GDP growth is negligible.

(2013) found that a 1% increase in the debt-to-GDP ratio results in a 0.027% decline in the yearly GDP growthrate. Égert (2012) discovered data indicating the presence of a negative link between public debt and GDP growth in 20 industrialized economies from 1946 to 2009; the author employed a standard linear model with 30%, 60%, and 90% thresholds Afonso and Jalles (2011) evaluated the impact of government debt on GDP per capita growth and productivity in 155 developing and developed countries from 1970 to 2008; utilizing both synthetic time series and OLS cross time series; they discovered a statistically significant negative relationship between government debt and GDP per capita growth in all economies studied.

High government debt levels can hinder sustainable economic growth, according to Reinhardt and Rogoff (2010) However, moderate debt levels below 90% of GDP have a weak impact on growth Despite this, government debt remains a concern due to rising spending Long-term economic expansion can be fostered by high government spending, but it also increases the budget deficit when consumption exceeds income To cover the deficit, governments may borrow domestically or internationally, potentially improving their financial situation, but leaving them vulnerable to economic fluctuations and high debt levels.

Due to the massive balance of payments impact of the mid-1970s oil crisis, indebted countries are battling with their enormous debt; this has a negative effect on economic development, as emerging economies attempt to maintain growth and strive to complete development projects (Stambuli, 1998) As the government borrows short-term and invests extensively in long-term initiatives, it is difficult for them to collect the revenues necessary to meet their debt obligations (Krumm, 1985).

In a group of emerging countries (Armenia, Azerbaijan, Belarus, Bulgaria, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Romania, Tajikistan, and Ukraine), Shkolnyk et al (2018) demonstrate that the negative impact of external debt on economic growth is statistically significant at the 5% confidence level only for Armenia, Azerbaijan, Belarus, Kazakhstan, and Moldova.

Additionally, excessive debt may impact economic growth via channels, primarily by inhibiting investment High amounts of external debt may impede the implementation of policy measures such as fiscal adjustment and trade liberalization by the government This reluctance would have a detrimental impact on economic growth by generating a less favorable macroeconomic policy environment This impacts both the quantity and the investment efficiency Investors may prefer short- term capital projects above long-term capital projects if they are uncertain about the debtor's ability to repay A compromise that can diminish investment returns and impact economic growth (Pattilo et al., 2002) Kharusi and Ada (2018) discovered a statistically significant negative relationship between Oman's external debt and economic development from 1990 to 2015.

Siddique et al (2016) use an automatic distribution delay (ARDL) model;with control variables for trade, population and capital formation - to observe whether debt as a ratio of public debt to GDP affects growth in 40 indebted countries from 1970 to 2007; The authors find that the debt variable has a negative and statistically significant effect on GDP in both the short and long run, in line with prior expectations They also emphasize that increasing levels of debt havea detrimental effect on economic growth in indebted nations, as a significant portion of their output is spent to repay foreign lending institutions; this discourages investment.

Snieka and Burksaitiene (2018) evaluate the impact of changes in real public debt, real private debt, and deflationary housing prices on GDP in 24 European Union (EU) nations using least squares regression (OLS) and autoregression (AR) with panel data The minor euro area countries were removed from the analysis since the volatility of financial services affected the fluctuations of their small economies In the 24 examined European Union nations, the negative impact of public debt growth on the economy is significant when measured with a lag of zero, one, or twoyears.

Lim (2019) examines the relationship between debt and growth when total private and state debt is considered The sample consists of 41 nations from 1952 to

2016 The research makes use of a vector autoregression (VAR) model Lim discovered a negative correlation between the rate of overall debt increase and the rate of economic growth.

Abubakar and Suleiman (2020) build an analytical model that evaluates the impact of public debt on economic growth in 37 OECD nations using two-stage least squares regression In contrast to previous research, the authors of this study analyze both the long-term and short-term effects of public debt on economic growth The findings indicate that public debt has a substantial permanent and temporary positive effect on economic growth The extent of the negative permanent effect of debt exceeds the favorable temporary benefit In addition, not all nation groups receive transitory good impacts, while all country groups experience persistent negativeconsequences.

Asteriou, Pilbeam, and Pratiwi (2020) investigate the short- and long-term relationships between public debt and economic growth in 14 Asian nations between 1980 and 2012 The authors employ an ARDL model and a group mean(MG) estimator to ensure consistency between short-run and long- runr e l a t i o n s h i p s

THEBASISOFDESIGNINGEMPIRICALRESEARCHMODEL

Previous researches have demonstrated that many emerging nations tend to embrace pro-cyclical fiscal policies During economic downturns, governments reduce expenditure and raise taxes, while during economic expansions, they increase spending and reduce taxes The cyclical nature of fiscal policy is deemed unsatisfactory for both developed and developing countries During a recession,private consumption and investment diminish as a result of decreased demand, and they will worsen if governments undertake contractionary policies Similarly,cyclical fiscal policy causes the economy to overheat during periods of economic expansion The economy becomes overly optimistic as a result of tax cuts, more governmentspending,andhigheraggregatedemandfromtheprivatesector.The re is a lot of evidence that emerging countries use cyclical fiscal policy, even though its implementation is notdesirable.

Developing economies often pursue cyclical fiscal policies due to inefficiencies and credit constraints in international credit markets, resulting in limited access to credit instruments during negative economic shocks Additionally, political factors such as distorted political regimes, weak political institutions, and political polarization contribute to the cyclical nature of fiscal policy in these countries Studies have examined factors like social inequality, institutional structures, and imperfect credit markets to explain the prevalence of cyclical government spending, finding that political factors and social inequality are associated with procyclical public expenditures.

Prior studies have concentrated primarily on government spending as a proxy for fiscal policy The proxies of government revenue have not been taken into good consideration due to the dearth of information on revenue and tax rates for developing nations Numerous studies and theories have been conducted on the cyclicality of fiscal policy in emerging nations According to Talvi and Végh(2005),regressionisthemosteffectivetoolformeasuringthefiscalpolicyreaction to the business cycle In order to construct regressions, the dependent variable must be identified as an outcome of fiscal policy, government spending, or the fiscal balance, which are the most frequently employed variables The evolution of the GDP in several forms (logarithmic or growth rate) is also often employed to measure business cycle changes.

Although it would be good to monitor the evolution of tax collections in order to more accurately evaluate the cyclical aspects of countries' fiscal strategies. However, tax-related variables in the sample are frequently inconsistent over the long term Moreover, depending on the country sample analyzed, tax revenues may also be affected by other significant factors, such as tax evasion and the shadow economy, the impact of elections, government regulation of tax collection, or consumption Even though some aspects may be defined, the information data of the countries under examination are of dubiousreliability.

This study is founded on the budget deficit-related theory that explains why public debt can be detrimental to economic growth According to this hypothesis, an increase in the budget deficit results in an increase in the government's demand for capital from the private sector, as it seeks to borrow money from both domestic and international investors This means that, in a healthy economy, the government will begin to compete with private borrowers for a fixed source of savings, resulting in an increase in interest rates This rate increase could discourage and impede private sector investments in machinery and equipment This decline in investment reduces the total quantity of operating capital available to the economy, which in turn reduces the rate of future growth On the other hand, rising debt levels might cause investors to be concerned that a country would not be able to pay its creditors. Getting investors out of the nation's debt might cause an increase in interest rates since bigger returns must be provided to creditors for them to continue financing the nation's deficits A sudden increase in interest rates will "disturb" the financial sector and impact growth through this channel at that moment Financial crises induced by excessive debt have resulted in substantial economic costs for a number of nations over time (Reinhart and Rogoff, 2010).

In contrast, the growth-optimizing public debt threshold theory articulated by Sachs (1989) and Krugman (1988) is predicated primarily on the debt balancing hypothesis According to Krugman (1988), when the public debt is below a particular level, the government concentration impact will outweigh the investment effect; therefore, raising the public debt stimulates economic growth Krugman

(1988) states that economic growth can only occur when an increase in efficient public spending substitutes a decline in private spending However, Krugman

(1988) believes that public debt will have a negative influence on economic growth above a certain level since the plus attraction effect is greater than the private attraction effect The author contends that the crowding out effect arises when government loans to cover fiscal deficits lower the quantity of capital that can be provided to the private sector, hence decreasing overall national investment In a similar vein, Sachs (1989) argues that lower levels of public debt boost economic growth, but above a certain threshold, high levels of government debt increase economic instability via future tax hikes The author contends that extended economic uncertainty slows investment and consumption, reduces employment, and slows the pace of output growth due to the crowdingeffect.

Studies on the impacts of excessive public debt have not yet yielded a consistent outcome, and additional research is required on this topic, particularly with the calculation of the diverse effects of high and persistent public debt on economic growth across countries Existing empirical research indicates a nonlinear and concave functional link between public sector debt and economic expansion (Panizza & Presbitero, 2014) This suggests that public debt and growth have an inverted U-shaped connection, so that when a particular threshold level of public debt is exceeded, the positive effect becomes negative However, it should be noted that the projected threshold values do not provide a growth projection target level It is acceptable to believe that the study provides concrete evidence of the nonlinear relationship between public debt and economic development in this scenario. Instability in debt dynamics may raise the probability of detrimental effects on capital accumulation and productivity growth, which may have a negative influence on economic growth Consequently, the study can contribute to ab e t t e r understanding of the problem of excessive public debt and its impact on economic activity.

Numerous empirical studies have examined the association between governmental debt and economic growth Nonetheless, the empirical data about the asymmetric effect, the public debt threshold, remains equivocal and inconsistent. Most research indicate that public debt below a particular threshold has a favorable impact on economic growth (Reinhart and Rogoff, 2010; Baum et al., 2013; Woo and Kumar, 2015; Taylor et al., 2012; Irons and Bivens, 2010; Pescatori et al., 2014; Rankin and Roffia, 2003; Mencinger et al., 2015; Bexheti et al., 2020). Surprisingly few studies have investigated how public debt and the nonlinear impact of public debt affect economic growth in developing nations (Mencinger et al., 2015; Checherita and Rother, 2010; Bexheti et al., 2020) Emerging nations have encountered a variety of issues, including war, political instability, hyperinflation, massive public debt, and financial catastrophe In transition, these nations provide a fascinating case study, particularly on the relationship between public debt and economic growth Therefore, the purpose of this research question is to investigate the effect of Vietnam's public debt on economic growth To analyze the relationship between public debt and economic development, we suggest the four hypotheses listedbelow:

H1: Fiscal policy has a causal impact on the economic cycle in Vietnam. H2: Vietnam's fiscal policy responds positively to the economic cycle.

H3: The public debt hypothesis does not have a linear influence on economic growth, but public debt has a asymmetric effect on economic growth in Vietnam.

H4: The hypothesis that a decrease in public debt by a specific amount has a positive effect on economic growth, whereas a rise in public debt by the same amount has a negative effect on economic growth in Vietnam.

To examine the asymmetric relationship between Vietnam's public debt and economic growth, we employ NARDL econometric models and methodologies.

Several research examining the nonlinear effect of public debt and its effect on economic growth in transition countries provide the basis of this study's primary premise (Mencinger et al., 2015; Checherita and Rother, 2010; Bexheti et al., 2020).

RESEARCHMODEL

A downgrade regression is a multivariable regression in whichthecoefficient matrices are subject to constrained conditions Johansen estimated themodels

∆Ytand Yt-1depending on the ∆Yt-1, ∆Yt-2, ,∆Yt-p+1:

∆Y = ∆Z*D +u0Y = ∆Z*E +u1. Estimating the matrices D and E by OLS :D=(D 1 , D2,…, Dp-1) ∆Y∆Z'(∆Z∆Z')-1 E=(E1, E2,…, Ep-1) = Y∆Z'(∆Z∆Z')-1 The residuals R0and R1of the equation (4.1.3.12) and (4.1.3.13):

R0tand R1tare the residuals at t:

The VAR model that is derived (4.1.3.6) is reduced to the model :

𝑅 0𝑡 = αβ'𝑅 1𝑡 + 𝑢 𝑡 , Assuming u has a normal distribution, then the rational function of this model depends only on𝑅 0𝑡 and𝑅 1𝑡

𝑘 −2𝐿𝑛( (𝑅 0 + 𝑅 1 (αβ 0 1 where k includes all constants after function constraint.

We find the maximum of this CLF The solution is not unique because for eachα, β' and any non-degenerate G matrix, we have:∏= αβ'=αGG -1 β'=α ∗ β'*, withα ∗ αG;β'*=𝐺 −1 β' is a solution approach.

Under unconstrained conditions, the optimal value of the matrix product Π is achieved when Π equals the product of transpose matrices 𝑆 01 and 𝑆 −1 However, the challenge lies in finding a solution that satisfies the association condition, which specifies the level of both matrices α and β' to be the same as r.

The solution is found by solving the following eigenvalue problem:

Solving the above system of equations will give m eigenvalues𝜆 𝑖 and m eigenvectors𝜔 𝑖 Normalize the result:𝜔′𝑆 11 𝜔 = 𝐼.

Sort𝜆 𝑖 in descending order and select the r eigenvectors corresponding to the r biggest of𝜆 𝑖 values.

Then, the highest plausible estimate of the matrix𝛽is provided by the formula:

Logarithmic Maximum Value of CLF function

The eigenvalues represent the canonical correlation between Ytvà Yt-1. Thiscorrelation coefficient represents the highest correlation between linearcombinations of Y t và Yt-1 The co-integration relations can be seen to be linear combinations of Yt-1that are maximally correlated with linear combinations of∆Y𝑡under constant circumstances.

The VECM model features the form: yt- yt-1= (A1+ A2+…+Ap- I) yt-1- (A2+…+Ap) (yt-1- yt-2) - (A3+…+Ap)( yt-2- yt-3)-…- Ap(yt-p+1- yt-p) + ut Δ yt= Π yt-1+ C1Δ yt-1+ C2Δ yt-2+…+ Cp-1Δ yt-p+1+ ut

Whereas: Π = -(I - A1- A2-…- Ap); Ci= - Σppj=i+1Aj ,i =1 , 2 … p - 1

The model containing the term Π yt-1is the error correction part of ECM

If ythas k cointegration relations, then Π has the form: Π = α xβ

Then: Δ yt= αβ yt-1+ C1Δ yt-1+ C2Δ yt-2+…+ Cp-1Δ yt-p+1+ ut

Given ECt-1= β yt-1: non-stationary sequence combinations in ytto a stationary sequence, and ECt-1represents the residuals of these non-stationary sequence combinations And ECt-1represents the state of imbalance at time t-1, then α represents the adjustment coefficient of Δ ytwhen an imbalancearises.

After conducting time series stationarity tests, the regression model will be evaluated and selected.* Non-stationary time series should be transformed into stationary ones by differencing to higher orders.

The Unit root test concludes that the Ho hypothesis of a unit root is rejected at α=0.05% for all variables, indicating that the series is stationary after the same order of differencing Therefore, the data series are considered stationary with a consistent order of difference.

= 0 (no cointegration between variables), however when k = 1 (At most 1), p– val ue

> α should accept the hypothesis Ho: r = 1 The series have cointergration with each other.

Typically, it is possible to find the optimal delay for a model using the PACF chart of the BOX-JENKIN approach or the LogL, AIC, SC criteria In this instance, the criteria LR, FPE, AIC, and HQ will be employed to identify the optimal model latency There are numerous information criteria that can be usedtodetermine the model's lag In his study, Johansen (1990) demonstrated thattheVECM latency is one order smaller than the VAR Correspondingly, the authors define their hypothesized lag in the presentanalysis.

To assess the stability of the VECM model, use the AR Root Test to see whether the solutions or eigenvalues are all less than 1 or contained within the unit circle If this is the case, then the VECM model is stable.

The tests demonstrate that the stationary series have the same order of difference, and the cointegration test reveals a single cointegration, indicating that the selection of the VECM model was suitable The VECM model is guaranteed to be stable and appropriate for regression when the right latency is used From there, the author draws findings based on analysis of variance decomposition and impulse response functions.

In order to determine the stationarity of time series, the author has performed the unit root test The results demonstrated that the data series are stationary with the same level of association: I(1) Therefore, the Engle – Granger test ortheJohansen test can be used to determine whether or not the data series are cointergrated The author employs the VECM method based on the study of Johansen (1990) to test for cointegration if the stationary series have the same order of difference Johansen performs a series of statistical tests to identify the number of linked vectors, including checks for cointegration and tests to find the maximum number of data chain cointegrations The results indicate that the data series are cointegrated.T h e V E C M r e g r e s s i o n m o d e l i s s e l e c t e d C h e c k i n g f o r s t a t i o n a r i t y and cointegration of data series is necessary for determining the appropriate VECM model and avoiding spurious regression or particular error issues Furthermore, the stationary variables have the same order of difference and are cointegrated suggests that a regressive VECM model is required (Granger et al., 1987).

The VECM model does not differentiate between endogenous and exogenous variables when analyzing the mutual impact of variables within the model. Consequently, the VECM model has the advantage of evaluating both the short- and long-term causal relationships between variables In addition, VECM can be applied to short-time series data, making it appropriate for Vietnam's data sources.

In regression analysis involving time series data, if the regression model contains both the present values and the lagged values (past values) of the variables, this model is known as the lagged distribution model If among the explanatory variables of the model include one or more lagged values of the dependent variable, the model is called autoregressive model.

NARDL regression model will be considered and selected after conducting tests, especially testing for stationary of time series Non-stationary time series will be stationary transformed by taking the difference at a higher order.

NARDL (Non-linear Auto Regressive Distributed Lag) permits the determination of the disproportional influence of independent variables on the dependent variable: dYt= m +α1x dYt−1+α2xdYt−2+…+αnxdYt−1+ β0xdXt+ β1xdXt−1+…+ βnxdXt−n+ β2nxX t−1+ut

Whereas dYtand dXtare the stationary variables after the difference, and utis the white noise residuals dYt−nand dXt−nare stationary variables at lags

NARDL is used in regression analysis involving time series data:

+P 𝑞 X 𝑡−𝑞 +u 𝑡 Xt=A 1 X 𝑡−1 +…+A 𝑞 X 𝑡−𝑞 +ɛ 𝑡 u 𝑡 ɛ 𝑡 are white noises with stationary covariance matrix

Y is regressed against the lagged values of Y itself and other X variables

In terms of financial econometrics, the NARDL model is crucial The purpose of this study is to investigate the effect of Vietnam's public debt on the country's rate of economic expansion using a dynamic regression model with an asymmetrical distribution lag(NARDL):

GDP = f(IRB, USD/VND00, LIA, BMG)

Shin et al (2014) introduced asymmetry in the short run and long run by separating positive and negative explanatory variable coefficients When testing the relationship between asymmetric time series, this model has the benefit of being applicable to real-world settings and applicable in the economics sector Shin et al.have developed a long-term asymmetric NARDL regression model: y  x   x u (1) t t t t

VARIABLES DESCRIPTIONS OFTHE RESEARCHMODEL

3.2.1 Thevariables of the model of the relationship between fiscal policy and the businesscycle

This study provides a fresh perspective on Vietnam's fiscal policy's response to the economic cycle in terms of public spending The thesis has built a research model with variables indicating the economic cycle and fiscal policy based on Talvi and Végh's (2005) model.

Table 3.1 Sources of variables used in the model

Variables Symbol Ratios/ Calculation method

Vietnamproduction GDP GDP index(%) IMF

Publicdebts LNLIA LIAindex, logarithm IMF

According to the research of Debrun and Kapoor (2011), Furceri and Jalles

(2016), and Afonso and Jalles (2013), the size of government spending is frequently regarded as the most significant factor in determining fiscal policy stability Keynes

(1936) argued that the economic cycle is caused by fluctuations in economic growth accompanied by recessionary peaks and troughs Therefore, the study used certain variables, including economic growth (GDP) reflecting the business cycle and government spending (representing fiscal policy).

3.2.2 Thevariables of the model of public debt on economicgrowth

The study includes five variables, which are presented in detail in Table 3.2: economic growth, government spending, lending interest rates, USD/VND exchange rate, and government debt The independent variable GDP symbolizes economic growth, whereas public debt reveals the government's domestic and foreign debt levels In addition, the study employs control variables, including government expenditures, lending interest rates, and the USD/VND exchange rate. These are the transmission factors associated with monetary policy and fiscal policy for analyzing the effect of public debt on economic growth These model variables are consistent with theory and prior empirical research (Mencinger et al., 2015; Checherita and Rother, 2010; Bexheti et al.,2020).

Table 3.2 Description of the model variables

GDP Economic growth % Dependent variable

LIA Publicdebt Logarit Asymmetric variable

The following particular model has been created:

RESEARCHDATA

3.3.1 Researchdata of the model of the relationship between fiscalpolicy and the business cycleTable 3.3 Descriptive statistics of the variables

Source: Author’s summary and calculation

The data is applicable for the years 2000 through 2021 The percentage ofVietnam's gross domestic product (GDP) is derived from the IMF's international financial data Government Spending Variables, Government Tax Revenue, andGovernment Debt are collected from from IMF international financial statistics The government's expenditure; Government tax revenue and government debt is a trend variable that does not have a normal distribution; the deviation must be very large;research is required to convert this variable to logarithmic base natural form so that the variable has a distribution close to the distribution standard and meets the model's input data conditions In addition, variables with an annual frequency are frequently affected by the seasonal factor Using the Census X12 tool, this study isolates the impact of the seasonal element from the data series.

3.3.2 Researchdata of the model of public debt on economicgrowth

Table 3.4 shows the descriptive statistics of the variables used in the study, including GDP, EXP, IRB, LIA, USD/VND00 Where GDP, IRB and USD/VND00 are regularly distributed, while EXP has a large standard deviation, a highmean,and a severely skewed Jarque-Beraindex.

Table 3.4 Descriptive statistics of variables

Value IRB GDP LIA USDVND EXP

Source: Regression result from Eviews10

IMF financial statistics (IFS) quarterly data are used to examine the nonlinear influence of public debt on Vietnam's economic growth over the period from the first quarter of 2000 to the first quarter of 2021 Vietnam's gross domestic product(GDP)andlending rate ( IR B) ar e expressedas apercentage;govern ment debt (LIA), government spending (EXP), and USD/VND00 are non-normally distributed propensity variables, thus they must be transformed to logarithmic form.

RESEARCH RESULTSANDDISCUSSION

EXAMININGTHERELATIONSHIPBETWEENFISCALPOLICYAND THEBUSINESSCYCLE

AND THE BUSINESS CYCLE 4.1.1 Testsof the researchmodel

When analyzing time series data, a model is considered credible if the dataseries used in the research are stationary data series A time series Y t is stationary ifthree conditions are met: its mean and variance are constant over time, and thecovariance between Y t and Yt-sdepends only on the distance between the two timepoints s and not on the time t If the time series are not stationary, the regression may produce erroneousresults.

To test whether Yt is stationary that means check whether Yt is a random walk:

The Dickey-Fuller unit root test was employed to assess the stationarity of the LNEXP and GDP time series The results revealed that both series exhibit non-stationarity, as the null hypothesis (Ho) of a unit root (d = 0) was rejected at a significance level (α) of 0.05 This implies that the time series are not constant in their mean and variance over time.

Table 4.1 Unit root test of data series (d=0)

Augmented Dickey-Fuller test statistic Prob.*

Null Hypothesis: LIA has a unit root 0.5113

Null Hypothesis: EXP has a unit root 0.1692

Null Hypothesis: TAX has a unit root 0.1145

Null Hypothesis: GDP has a unit root 0.0529

Hypothesized Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

The results of the test indicate, with a significance level of α = 0.05, that all accept Ho hypothesis of the presence of a unit root, therefore the series EXP, TAX, LIA, and GDP do not stop at the difference d = 0.

Table 4.2 Unit root test of data series (d=2)

Augmented Dickey-Fuller test statistic Prob.*

Null Hypothesis: LIA has a unit root 0.0000

Null Hypothesis: EXP has a unit root 0.0000

Null Hypothesis: TAX has a unit root 0.0000

Null Hypothesis: GDP has a unit root 0.0000

The vast majority of economic time series are non-stationary, however they can be converted to stationary series by the process of difference If a series is non- stationary and stops at a difference of order d, it is referred to as a connected seriesoforderdwithSymbol:Yt͌I(d).UsingtheDickey–Fullerunitroottesttoexaminethe stationarity of the LNEXP and GDP series, respectively, at a difference of d=2

Using a significance level of α = 0.05, the unit root test results indicate that the existence of unit roots in Ho hypothesis is not supported, hence the series EXP, TAX, LIA, and GDP stop at the second difference level Consequently, the data series are stationary with the same difference order, then the cointegration test will continue to be conducted.

Since the data series are stationary with the same order of difference(d=2),the Johansen test is performed to check whether the series EXP, TAX, LIA, GDP are cointegration or not.

Table 4.3 Cointegration test of data series

No of CE(s) Eigenvalue Statistic CriticalValue Prob.**

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

*denotes rejection of the hypothesis at the 0.05 level

**MacKinnon-Haug-Michelis (1999) p-valuesUnrestricted Cointegrating

Source: Regression Results The results obtained from Johansen's test show that the series EXP, TAX, LIA, GDP have cointegration, at the significance level α = 0.05, p -value = 0.0194< α, so the null hypothesis Ho: r=0 ( there is no cointegration between variables).

Thus, when the series are stationary with the same order of difference (d=2) and Johansen's test shows that the series have cointegration Therefore, the VECM model selected to test the relationship between the economic cycle and the fiscal policy of Vietnam is appropriate.

Granger's Wald Tests help determine whether the variables included in the model are endogenous or exogenous, and are necessary to be included in the model. The variables in the model include: EXP, TAX, LIA, GDP when conducting Granger's Wald Tests.

Null Hypothesis: Obs F-Statistic Prob.

GDP does not Granger Cause EXP

EXP does not Granger Cause GDP

LIA does not Granger CauseEXP

EXP does not Granger CauseLIA

TAX does not Granger CauseEXP

EXP does not Granger CauseTAX

LIA does not Granger CauseGDP

GDP does not Granger CauseLIA

TAX does not Granger CauseGDP

GDP does not Granger CauseTAX

TAX does not Granger CauseLIA

LIA does not Granger CauseTAX

Source: Regression Results The results show that at the significance level α = 0.05, EXP has an impact on GDP (5%), GDP has an impact on LIA (5%), TAX has an impact on GDP;Atthe significance level α = 0.1, LIA has an impact on GDP (10%) Thus, the variables are all endogenous and necessary to be included in the model

4.1.1.4 Stability Test in the researchmodel

To test the stability of the VECM model, use the AR Root Test to consider whether the solutions or the eigenvalues are not greater than 1 or are not outside the unit circle, the VECM model achieves stability.

The results show that the solutions are not larger than 1 or are not outside the unit circle, so the VECM model is stable, the model is suitable for regression:

Fugure 4.1 Stability test of the model

4.1.2 Results of testing the relationship between fiscal policy andeconomicgrowth

After conducting VECM model tests, VECM regression model results are obtained as follows: u = GDP - 0.095912EXP + 1.881209LIA + 26.02291TAX+ 3.100242 GDP = -3.100242 + 0.095912EXP - 1.881209LIA - 26.02291TAX+ u

In the long run, the volatility of GDP is positively related to the volatility of EXP and inversely with the volatility of LIA and TAX.

Combination of non-stationary sequences into a stationary sequence, and ECt-1 is the residual in that combination ECt-1 = α indicates an imbalance in the t-

1 period, α is the adjustment coefficient when an imbalance occurs in the short run.

ECt-1 = -0.910403, shows that if the previous period imbalance is 1 unit, at the first period, the dependent variable will adjust back to the equilibrium 91%. Thus, it takes a total of more than 2 periods to restore equilibrium.

To analyze the causal relationship between fiscal policy and the business cycle, variance decomposition functions and impulse response functions will be constructed These functions assist in analyzing the direct and indirect impacts of one factor's shock on another This enables author to properly comprehend their dynamic connection The author use the Cholesky factor coefficient recommended by Sims (1980) to determine the system's shocks.

Figure 4.2 The Impulse Response function of EXP, TAX, LIA, GDP

Source: Regression Results Government spending volatility shocks result in an initial positive response to real GDP, which has a negative effect and is particularly pronounced in the first four periods This is explained by the fact that Vietnam is a developing nation; when the economy is strengthened with a sum of capital from government spending, production will increase and economic growth will be positively promoted When spending outpaces production requirements starting in the sixth period, the GDP response fluctuates slightly over the longterm.

The responsiveness of GDP to LIA shocks has continually reversed since the first phase Government borrowing will increase the volatility of interest rates and can have crowding-out effects on the private sector Therefore, fluctuations in government debt will have significant effects on economic growth.

Similarly, tax income is one of the indicators of the response of the economy to the state's fiscal policies Increasing tax income is not always conducive to economic growth.

When economic development slows, government spending decreases,andt h e g o v e r n m e n t i n c r e a s e s b o t h p u b l i c d e b t a n d t a x c o l l e c t i o n s t o c o v e r t h e deficit.

EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMICGROWTH 92

To test whether Ytis stationary, Dickey – Fuller test is conducted:

With significance level α = 0.05, if Hois accepted, the time series is non- stationary; if Hois rejected, the time series is stationary Applying Dickey –Fullertest for data series EXP, GDP, IRB, USD/VND00 and LIA

Table 4.7 Unit root test of data series (d=0) Augmented Dickey-Fuller test statitic t-Statistic Prob.*

Null Hypothesis: GDP has a unit root -2.874037 0.0529 Null Hypothesis: LNUSDVND00 has a unit root -1.026399 0.7404 Null Hypothesis: IRB has a unit root -1.748785 0.4032

Null Hypothesis: EXP has a unit root -2.317600 0.1692 Null Hypothesis: LIA has a unit root -1.534560 0.5113

The test results, with the significance level α = 0.05%, all accept thehypothesis H o , thus the series GDP, IRB, USD/VND00, EXP and LIA all donotstop at difference d =0.

Continue to test the stationary of the series GDP, IRB, USD/VND00, EXP and LIA at the first difference:

Table 4.8 Unit root test of data series (d=1) Augmented Dickey-Fuller test statitic t-Statistic Prob.*

Null Hypothesis: GDP has a unit root -4.759976 0.0002 Null Hypothesis: LNUSDVND00 has a unit root -2.302451 0.0173 Null Hypothesis: IRB has a unit root -8.221248 0.0000 Null Hypothesis: EXP has a unit root -1.424586 0.0466 Null Hypothesis: LIA has a unit root -6.325325 0.0000

The test results with significance level α = 0.05%, all reject the hypothesisH o , so that the series GDP, IRB, USD/VND00, EXP and LIA stop at the firstdifference Thus, the data series are stopped at the first difference.

Table 4.8 displays the outcomes of the initial unit root The results indicate that the series GDP, IRB, USD/VND00, EXP, and LIA stop at the difference I(1). Unit root testing is essential for the NARDL model because the lagged autoregressive model applies stationary series at I(0) or I(1) or a combination of I(0) and I(1) The model cannot be applied when any variable stops at second order I(2). Because the inclusion of variables I(2) invalidates the F-statistic of the cointegration test (Ibrahim, 2015; Ouattara, 2004) In the NARDL methodology, unit root testing is essential The results demonstrate that no series stops at the second order, allowing this research to proceed to the NARDLmodel.

The results show that at the significance level α = 0.05, p -value = 0.0065