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.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 OF THE RESEARCH

THE RATIONALE OF RESEARCH

Economic growth has stagnated in many countries since the financial crisis, leading to downward revisions in growth forecasts Public debt has also surged, especially in developing economies, prompting questions about the relationship between fiscal policy and economic growth.

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 policy, alternating expansionary and contractionary measures to stabilize the economy During economic downturns, they employ expansionary fiscal policy by increasing unemployment insurance and social transfer payments, while tax revenues decline due to reduced personal income Conversely, when the economy experiences growth, they shift to contractionary fiscal policy to prevent overheating This strategy utilizes automatic stabilizing instruments to achieve these cyclical adjustments.

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, 2016) When governments employ borrowing as an alternative to taxation, this results in public debt(Ogunmuyiwa, 2011) Consequently, public debt consists of the government's short- and long-term loans used to support public expenditures due to insufficient public revenue As a result of the worldwide economic crisis following World War II, many economies(including wealthy and 174 emerging nations) were forced to borrow locally or internationally to pay their budget deficit.

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 economic growth once it beyond a certain threshold number According to Mankiw

(2013), the government expenditure deficit surpasses the self-accumulation that can be paid by domestic and international businesses Public debt consists of both local and international debt 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).

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 economic growth

5 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 these countries.

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 that overusing and maintaining a high public debt will have negative effects on the

6 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 in Vietnam 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 Vietnamese economy.

RESEARCH OBJECTIVES

This study investigates the causal relationship between fiscal policies and economic cycles, providing a framework for quantifying the asymmetrical impact of Vietnam's public debt on economic growth By analyzing this asymmetry, policymakers can develop effective fiscal policies that optimize economic stability and growth in Vietnam.

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

(1) Assessing the impact of fiscal policy determinants on economic growth in

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

(3) Examining the asymmetric impact of public debt on economic growth in

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

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 economic expansion?

(3) Does public debt have an asymmetric impact on economic growth in Vietnam?

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

OBJECTS, SCOPE AND METHODOLOGY OF THE RESEARCH

The study examines the relationship between fiscal policy and the business cycle in Vietnam from 2000 to 2021, focusing on public debt and economic growth Research data includes quarterly economic indicators from the IMF and Vietnamese government sources, such as GDP, government spending, public debt, exchange rates, and monetary variables Since trend variables exhibit non-normal distributions with significant deviations, they are transformed using logarithmic base natural form and adjusted for the exchange rate using 2000 as the base year.

This study employed quantitative methods, including the VECM model, to investigate the nexus between fiscal policy and Vietnam's business cycle The NARDL asymmetric regression model was utilized to analyze the disparate impact of public debt on economic growth in the country Based on these findings, the research proposes policy recommendations for managing Vietnam's national debt, ensuring its sustainable development and financial stability.

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 crucial prerequisite for employing theVector Error Correction Model (VECM) is

8 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 inVietnam This analysis is based on the observed level of causality between fiscal policy and the economic cycle The primary requirement for using the NARDL model is that the data series should exhibit integration at the most elevated level of differencing, specifically of order 1.

THE SIGNIFICANE AND CONTRIBUTIONS OF THE RESEARCH

This study aims to contribute to understanding the relationship between public debt and economic growth by addressing a research gap identified in the existing literature Building upon theoretical frameworks and empirical evidence, the study incorporates novel perspectives and insights to advance the discourse on this topic.

The relevance and theoretical contribution to science of the research

(1) The paper contributes to the application of theoretical foundations on public 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 empirical studies.

Contribution to empirical research, and practical importance

(2) Domestic research relies primarily on qualitative analysis, while international studies utilize the linear or threshold approach This article incorporates a model of the asymmetric impact of public debt on economic growth in Vietnam Second, the author rewrites the study under more volatile and integrated real-world conditions, where capital flows are highly liberalized,

9 currency rates are more volatile, and global economies are dynamic The economies of the countries have experienced numerous fluctuations in recent years.

(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 likeVietnam Second, the theory has demonstrated that Vietnam's public debt has a asymmetric effect on economic growth.

RESEARCH CONTENTS

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 between fiscal policy 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 schools of thought (Classical, Keynesian, Ricardian, and Modern Monetization) have presented varying explanations regarding the causal relationship between public debt and economic growth.

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 test the asymmetric 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

10 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 in Vietnam.

THEORIES AND LITERATURE REVIEW

THEORIES OF FISCAL POLICY AND BUSINESS CYCLE

2.1.1 Concepts relevant to the research problems

2.1.1.1 The concept of fiscal policy

Fiscal policy is a subset of macroeconomic policy that influences economic activity through alterations in government expenditure and/or taxation The purposes of fiscal policy are to: Mobilize financial resources to meet the state's spending needs; Promote economic restructuring, and ensure stable and sustainable economic growth; Contribute to the stabilization of the market and commodity prices; and Redistribute social income among different classes of the population (Furceri and Jalles, 2016).

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

12 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).

Macroeconomic policy in developed countries aims to stabilize the economic cycle, applying countercyclical fiscal policy to accumulate during economic expansions In contrast, developing countries adopt a pro-cyclical macroeconomic policy, prioritizing investments and public spending during economic recovery to foster economic growth This approach reflects the limited automatic stabilization instruments available in developing nations, which lack robust unemployment insurance and social transfer programs Government spending in these countries primarily comprises consumption and wages, and indirect taxes often substitute direct taxes Effective fiscal policy in developing nations involves using these tools strategically during economic downturns or expansions to achieve long-term macroeconomic management goals (Vegh and Talvi, 2005).

2.1.1.2 The concept of the Business Cycle

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

13 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

Financial crises like those of 1997 and 2008 highlight the unpredictable nature of economic cycles The timing and duration of these cycles remain elusive Governments strive to manage economies through fiscal and monetary policies, while ongoing research aims to mitigate crises and prevent overheating Despite these efforts, economic cycles continue to challenge policymakers due to their inherent unpredictability.

Economic cycles, driven by market fluctuations, result in alternating periods of economic peaks and troughs Fiscal and monetary policies implemented in response to economic shocks play a crucial role in shaping the subsequent trajectory of the economy, as highlighted by Keynes' theory (1936).

2.1.2 Theories of Fiscal Policy and Business Cycle

According to Keynesian theory, prices or wages represent instantaneous price adjustments that are not fully responsive to fluctuations in demand the With the 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 the 1980s.

John Maynard Keynes proposed government intervention to combat economic crises and unemployment by raising taxes and increasing government spending, which stimulates aggregate demand This public investment injects funds into the income stream, but it's funded by tax revenue, reducing consumption and corporate profits Government borrowing can also finance these expenditures, leading to budget deficits and increased debt However, tax cuts to boost demand may exacerbate deficits, and while increased government spending may raise marginal revenue, it can have negative secondary effects on business conditions and productivity.

15 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 deficit was the "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 under the framework of fiscal policy. However, in the 1970s and 1980s, the downsides of Government spending programs began to show, compelling economists and political scientists to research government failures Therefore, the market frequently fails, and the government rarely succeeds in overcoming market failures Among the primary reasons for government failure are: Slow policy issuance and implementation results from limited information, limited control over the private sector, bureaucracy, and constraints of the political consultation process (Le Mai Trang, 2018).

The most ideal form, according to current contempotary economic theory, is a mixed economy with a balanced role for the government and the market (Mankiw, 2005) The government manages the market using tax,expenditure, and regulatory programs within a market economy model that decides prices and output Market

16 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).

THEORETICAL OF PUBLIC DEBT AND ECONOMIC GROWTH

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 refers to the legal obligation of the state to return principal and interest to the holders of predetermined rights according to a certain schedule Public credit and public debt, also referred to as state debt, are debts owed by the

17 government or other public institutions Borrowing is possible in some cases, such as large infrastructure investments and wars, but it emphasizes that borrowing should be limited and should not be continued After the Second World War, public debt increased significantly and changed structure due to the restoration of the economies and physical facilities of the countries affected by the war The other is the financial needs of developing countries In the later stage, the borrowing process is no longer transnational but begins to take on a new dimension with the establishment of international organizations such as the International Monetary Fund (IMF) and the World Bank (WB) (Ulusoy et al., 2013).

Public debt refers to unfulfilled government obligations that extend beyond specified deadlines, encompassing both domestic and international liabilities This includes loans, cash reserves, and currency-linked securities, as defined by the World Bank Report of 2015.

In the process of globalization, capital mobility is increasing, and increasingly 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 Classical theories of public debt and economic growth

According to classical economics pioneer Ricardo (1817), public debt can obscure a country's true financial state, fostering irrational government spending This is explained by the tendency for paper wealth, created through public borrowing, to inflate spending, creating a cycle of deficit and illusionary prosperity.

Government spending financed by debt can stifle economic growth by redirecting investment away from the private sector According to classical economic theory, this "crowding out" effect limits the expansion of capital and consumer goods, slowing the economy Domestic borrowing by the government can also lead to a liquidity crisis and high interest rates, further deterring 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 the public debt 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 andTaxation" 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-Ricardo Equivalence

Hypothesis, or REH (Ricardian) According to the research of Barro (1989) and Buchanan (1976), public debt has no negative economic effects as long as solvency is not an issue In other words, REH asserts that government debt explains financial mobility exclusively among economic players (Barro, 1989) Buchanan (1976) believes that governmental debt has only a direct effect on private spending and saving decisions, and has no effect on the likelihood of net economic growth This implies that changes in domestic and foreign public debt are independent of changes in major real macroeconomic variables, such as total investment and production, and hence do not effect economic growth (Barro, 1989) 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 change in government 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

Government debt can stimulate economic growth by encouraging job creation and reducing unemployment This increase in employment leads to higher incomes and consumption, resulting in a multiplier effect that augments national output and income Additionally, debt-financed public expenditures provide an additive effect, further amplifying economic growth and creating a positive impact on overall national wealth.

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 in tax revenues 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 higher tax band, 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 public debt.

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 that outstanding loans represent a circumstance in which the illiquidity impact, the

Theories of the linear impact of public debt on economic growth

This theory assumes that the impact of public debt on real macroeconomic indicators is negative The debt balance hypothesis explains fundamentally the negative impact of government debt on economic growth Myers

(1977) suggested that the accumulation of public debt during a fiscal slump affects the private sector's ability to make optimal future investment decisions (Reinhart et al , 2012) Several traditional growth models, primarily in neoclassical and endogenous contexts, support this notion, stating that public borrowing lowers fiscal discipline and increases future tax burdens (Buchanan, 1958; Diamond, 1965; Meade, 1958; Modigliani, 1961) According to Diamond's (1965) reasoning, the amount and variations in taxes resulting from domestic and foreign government debt have a detrimental impact on the development of total equity.

According to the debt balance hypothesis, public debt negatively affects economic growth through three pathways (Cecchetti et al., 2011; Cochrane, 2011b; Patinkin, 1965; Panizza & Presbitero, 2013; Perotti, 2012; Soydan & Bedir, 2015) The first is the rational expectations theory, which posits that the large influence of government debt on economic development is the result of erroneous macroeconomic forecasts (Churchman,

Public debt can hinder economic growth through several mechanisms High public debt can create uncertainty and lead to higher future taxes (rational expectations theory) Additionally, the crowding out effect occurs when government spending reduces private investment due to increased real interest rates (Huang et al., 2018) Government borrowing during a recession can also limit lending and stifle economic activity (Broner et al., 2014) However, the negative impact of public debt on private investment can be offset under certain conditions.

27 by either price (interest rate) or quantity (credit allocation) Further, repression theory contends that public debt financed by tax distortions or the issuance of debt exacerbates public policy inefficiencies, hence influencing the decision- making of private economic entities and resulting in divestment (Soydan & Bedir, 2015) According to Soydan and Bedir (2015), in an unstable economic environment, the majority of investments will be short-term and have quick paybacks, resulting in diminished long-term economic growth In addition, the impact of public debt on economic growth is determined by the framework of the investment, savings, and liquidity markets.

Wagner's notion of the "Law of growing state activity" and the Keynesian fiscal multiplier effect provide support for the significance of public debt in a country's economic growth On the other hand, Wagner (1893) theorized that there is a positive correlation between the level of economic development and the relative size of the public sector, which leads to an increase in public spending, primarily on debt Thus, in a restructuring state, government activities and functions expand to suit the economic, social, political, and cultural requirements of the populace (Bird, 1971) According to Wagner (1911), the progress of industrialization and urbanization necessitates the creation of infrastructure that is both complex and costly In other words, as society develops towards modernity and urbanization, the government provides more and more commodities and services Lybeck (1988) adds that education, health, and other social services and goods form a demand function that is income-elastic, and that increasingly sophisticated military technology will absorb a greater proportion of national wealth According to these theoretical frameworks, government securities (public debt) function as liquid assets, and their increase affects economic growth and liquidity provision (Kobayashi, 2015).

On the other hand, Keynes's view of the positive relationship between public debt and economic growth has two sides: (a) rising public debt causes high levels of efficient public spending, which then act as automatic stabilizers in the economy; and (b) deficit-funded government spending has a greater positive effect on the

28 multiplier than tax-funded government spending (Holtfrerich, 2013) Keynes's reasoning indicates that an increase in public sector spending (public debt) might promote domestic economic activity and entice private investment, hence raising the net rate of return (Elmendorf & Mankiw, 1999).

In addition to Keynes's view, there is another theory that explains the positive relationship between public debt and economic growth This theory is based on the premise that government borrowing from financial funds and interstate capital is required to fill the gap between domestic investment and saving (Pattilo et al., 2002). Elmendorf and Mankiw (1999) suggest that short-term foreign debt will stimulate aggregate demand and promote an increase in national output by introducing fresh financial resources into the economy.

Delong and Summers (2012) also claim that the effect of public debt on economic growth is beneficial: In an economy where output is below potential, high external debt will have a positive influence on the fiscal multiplier.

In other words, fiscal expansion is self-financing and promotes aggregate demand in a weak economy when interest rates rise, resulting in economic growth, according to Greiner (2006).

Domestic public debt can positively impact the economy By borrowing from the local debt market, governments can strengthen the domestic currency and financial markets (Gulde et al., 2006) This encourages private savings and investment (Abbas & Christensen, 2007) Well-developed domestic debt markets give monetary authorities less control over loan ceilings, interest rates, and reserve requirements However, financial regulations can influence lending decisions in the banking sector, leading to financial intermediation at the expense of savings and investment in the private sector.

Moss et al (2006) and Christensen (2004) describe the positive effect of domestic public debt on economic growth; government availability and access to

29 domestic funding can also help to counterbalance the effects of external shocks on the economy, which weaken domestic financial institutions Moreover, Christensen (2004) adds that the availability and accessibility of domestic public debt instruments can offer savers an attractive alternative to capital flight, as well as lure deposits from the non- monetary sector into the formal sector.

Theories of nonlinear effects of public debt on economic growth

In addition to the ideas outlined above, another hypothesis verifies the nonlinear connection between public debt and economic development The impact of public debt to economic growth is positive at lower levels and negative at larger levels, according to the threshold or nonlinear effect theory (Mupunga & Le Roux, 2015; Reinhart

& Rogoff, 2010b) On the basis of the debt balancing hypothesis, Sachs (1989) and Krugman (1988) primarily explicate this growth-optimizing public debt threshold theory 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 causes slower investment and consumption, fewer jobs, and a slower rate of output growth due to a crowding effect (Pattilo et al., 2002).

The idea underpinning why government borrowing might be detrimental to economic growth focuses mostly on deficits According to this idea, a growth in the budget deficit causes the government to raise its demand for

"loanable" capital from the private sector; it tries to borrow money from both domestic and foreign investors This indicates that, in a healthy economy, the government will begin to compete with private borrowers for a fixed supply of savings, hence increasing interest rates This rate increase could lessen the "crowding out" of private sector expenditures in equipment and plant This fall in investment reduces the amount of capital available to operate the economy, and this decrease in capital reduces the rate of future growth (Gale and Orszag, 2004).

Orszag et al (2004) and Ball and Mankiw (1995) imply that rising debt levels can cause investors to be concerned that a nation will be unable to pay its creditors As a result, investors exiting the country's debt might cause an increase in interest rates, as creditors must be assured of better returns to continue financing the nation's deficits A rapid increase in interest rates at that time will cause disruptions in the financial system and impact growth through this channel.

RELEVANT EMPIRICAL STUDIES ON THE RELATIONSHIP BETWEEN FISCAL

FISCAL POLICY AND THE BUSINESS CYCLE

2.3.1 Literature review of procyclical fiscal policy

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 spending decisions while the economy is booming Ilzetzki and Vegh (2008)

31 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 is pro-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

A study of 104 countries between 1960 and 2003 revealed that capital flows tend to amplify economic cycles in both OECD and emerging economies In contrast, fiscal and monetary policies in developing countries are often procyclical, particularly in upper middle-income nations For OECD countries, however, monetary policy is countercyclical Notably, in developing countries, capital flow cycles and macroeconomic cycles are mutually reinforcing, with capital inflows coinciding with expansionary macroeconomic policies and outflows coinciding with contractionary policies.

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 and Carlos Vegh

(2005) found that public consumption is cyclical across 36 developing

32 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 economic cycle and fiscal policy are linked, with distinct theories for developed and developing nations Access to credit markets, political structures, and wealth inequality polarization are key factors influencing the relationship Caballero and Khrisnamurthy (2004), Gavin and Perotti (1997), and Calderón and Schmidt-Hebbel (2008) highlight credit market constraints Lane (2003), Talvi and Végh (2005), and Alesina et al (2008) focus on political factors Lastly, Woo (2009) emphasizes wealth inequality polarization.

Alessia and Tabellini (2008) explored the association between corruption, political issues, and fiscal policy using data from OECD countries and a few non- member countries to construct models for 83 nations between

Studies have established that democracies with higher corruption levels tend to implement procyclical fiscal policies When voters perceive economic growth, they demand increased public goods and tax cuts, leading to a procyclical shift in fiscal policy This is driven by concerns that corrupt governments may misuse resources for political gain, incentivizing voters to request immediate benefits to minimize the risk of misappropriation.

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 democracies and corruption, 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

34 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 austerity measures.

Financial openness, measured by external debt and access to capital markets, allows for the implementation of countercyclical fiscal policies This is especially important for countries with limited financial intermediation, as excessive fiscal tightening can hinder long-term growth and increase vulnerability By mitigating economic downturns and promoting growth, financial openness supports economic stability and resilience.

Inadequate financial depth, measured by domestic loans and asset homogeneity, hinders effective fiscal policy implementation In developing countries, cyclical fiscal policy prevails due to limited capital supply from both private and public sectors, resulting in insufficient injections during recessions This, in turn, delays fiscal adjustments, suppressing investment during economic booms Additionally, imperfections in national credit markets further impact the business cycle.

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.

LITERATURE REVIEW BETWEEN PUBLIC DEBT AND ECONOMIC GROWTH 43

Numerous empirical studies have been conducted on the effect of public debt on economic growth, with varying results Despite the fact that some research have indicated that public debt slows economic growth, other studies have concluded that public debt actually helps to promote it.

2.4.1 Literature review 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), andMohd et al (2013) Empirical research on the relationship between government debt and economic growth, such asDiamond (1965), found that government debt restricts individuals' access to their savings and capital reserves Adam and Bevan (2005), Saint-Paul (1992), and Aizenman et al (2007)

44 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 growth rates.

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, Panizza and

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

Szabo (2013) also examined the impact of the ratio of public debt to GDP and GDP growth rate in 27 EU nations Using a linear regression model for the period 2008-2014, Szabo found that public debt has a negative influence on GDP growth in the short run and that growth is sensitive to changes in public debt levels Long-term, the influence of public debt on the GDP growth rate is minimal Szabo (2013) found that a 1% increase in the debt-to- GDP ratio results in a 0.027% decline in the yearly GDP growth rate. 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.

Reinhart and Roggof (2010) concluded in their analysis of sustainable economic growth with varying levels of government debt, based on data from 44 countries over a 40-year period (1970-2009), that the association between government debt and economic growth is weak for a share of GDP less than 90 percent As a result of the rising trend of government spending, the problem of government debt continues to deteriorate High government spending fosters long- term economic expansion As consumption exceeds income, the budget deficit will expand in size The government can raise loans from domestic or international sources to pay the deficit Although the financial situation may improve, it is very susceptible to changes in the current economic climate and the level of government debt.

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 have a

47 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 two years.

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 negative consequences.

THE BASIS OF DESIGNING EMPIRICAL RESEARCH MODEL

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 government spending, and higher aggregate demand from the private sector There

66 is a lot of evidence that emerging countries use cyclical fiscal policy, even though its implementation is not desirable.

Previous studies have attempted to explain why economies, particularly developing economies, elect to pursue cyclical fiscal policies There are two primary explanations for this: first, cyclical fiscal policy resulting from inefficiencies and credit limits on international credit markets (Gavin and Perotti, 1997; Kaminsky et al et al., 2004; Caballero and Krishnamurthy, 2004; Calderón et al., 2010; Aghion et al., 2014) The immaturity of these developing nations' credit markets makes their fiscal policy cyclical Emerging countries will utilize a limited variety of credit instruments in the event of negative economic shocks, based on their ratings, as shown in Latin American countries during times of crisis Periods of IMF loan utilization are significantly more frequent than typical periods (Gavin and Perotti, 1997) Alberola et al (2006) also confirmed the cyclical nature of Latin America's fiscal policy, arguing that the region's financial vulnerability is not only attributable to outstanding public debt levels, but also to fluctuations in financial conditions and their effect on the financial performance of financial institutions The second approach holds that political variables, such as the distortion of political regimes, the quality of political institutions, or political polarization, are the root problem of cyclical fiscal policy (Calderón and Hebbel 2008) Studies focus on identifying factors that may contribute to the procyclicality of public spending, examining theories related to social inequality (Woo, 2009), key structures countries (Alesina et al., 2008) and imperfect credit markets (Gavin and Perotti, 1997). The results show that political factors and social inequality are associated with cyclical government expenditures for the entire group of countries analyzed in the EU, in both cross-country regression and table data.

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), regression is the most effective tool for measuring the fiscal policy reaction

67 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 dubious reliability.

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 crowding effect.

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 a better

69 understanding of the problem of excessive public debt and its impact on economic activity.

Numerous studies have explored the relationship between government debt and economic growth, but the impact of the public debt threshold remains unclear While most research suggests that public debt below a certain level positively influences economic growth, fewer studies have examined this relationship in developing countries Emerging nations face unique challenges that may affect the impact of public debt on economic growth This research aims to investigate the effect of public debt on economic growth in Vietnam, a transitional country that has experienced various economic and political challenges To analyze this relationship, four hypotheses are proposed.

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).

RESEARCH METHODOLOGY

RESEARCH MODEL

A downgrade regression is a multivariable regression in which the coefficient matrices are subject to constrained conditions Johansen estimated the models ∆Yt and Yt-1 depending on the ∆Yt-1, ∆Yt-2, , ∆Yt-p+1:

∆Y = ∆Z*D +u0 Y ∆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 R0 and R1 of the equation (4.1.3.12) and (4.1.3.13): R0= ∆𝑌 - ∆𝑍 ∗ 𝐷 ∆𝑌-∆𝑌∆𝑍′(∆Z∆Z') −1 ∆𝑍

R0t and R1t are 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 on 𝑅 0𝑡 and 𝑅 1𝑡

𝑘 − 2 𝐿𝑛( (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 each α, β' and any non-degenerate G matrix, we have: ∏ = αβ'= αGG -1 β'= α ∗ β'*, with α ∗= αG; β'*= 𝐺 −1 β' is a solution approach.

If the matrix Π = αβ' has no constraints, then the maximum is Π = 𝑆 01 𝑆 −1

However, the problem is to find the solution corresponding to the association condition, which is r(Π) = r, r is the level of the α matrix and the β' matrix.

The solution is found by solving the following eigenvalue problem:

|𝑆 10 𝑆 −1 𝑆 01 − 𝜆𝑆 11 | = 0 Solving the above system of equations will give m eigenvalues 𝜆 𝑖 and m eigenvectors 𝜔 𝑖

Sort 𝜆 𝑖 in descending order and select the r eigenvectors corresponding to the r biggest of 𝜆 𝑖 values.

Then, the highest plausible estimate of the matrix 𝛽 is provided by the formula:

𝛽̂ = (𝜔̂ 1 , 𝜔̂ 2 , , 𝜔̂ 𝑟 ) And the estimation of the matrix 𝛼 is: 𝛼̂ = 𝑆 00 𝐶̂

Logarithmic Maximum Value of CLF function

Eigenvalues represent the maximum correlation between linear combinations of Yt and Yt-1, and co-integration relations are linear combinations of Yt-1 that exhibit the strongest correlation with linear combinations of ∆Y𝑡 in stable conditions.

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 + C1 Δ yt-1 + C2 Δ yt-2+…+ Cp-1 Δ yt-p+1+ ut

The model containing the term Π yt-1 is the error correction part of ECM If yt has k cointegration relations, then Π has the form: Π = α x β

Then: Δ yt = αβ yt-1 + C1 Δ yt-1 + C2 Δ yt-2+…+ Cp-1 Δ yt-p+1+ ut

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

After conducting tests, particularly the stationarity of time series test, the regression model will be evaluated and chosen When executing the test, non- stationary time series should be changed to stationary by taking the difference of higher order:

The Unit root test demonstrates, at a significance level of α = 0.05%, that all of them reject the Ho hypothesis regarding the presence of a unit root; therefore, the series stops at the same order of difference Consequently, the data series are stationary with the same difference order.

When k = 0 (None), p -value =0.0000 < α should reject the hypothesis Ho: r

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

> 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 used to determine the model's lag In his study, Johansen (1990) demonstrated that the VECM latency is one order smaller than the VAR. Correspondingly, the authors define their hypothesized lag in the present analysis.

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.

Stationarity and cointegration testing are crucial in time series analysis The Engle-Granger or Johansen test can determine cointegration if the data series are stationary with the same order of integration The Johansen test identifies the number of cointegrating vectors and tests for maximum cointegrations If the series are cointegrated, a vector error correction model (VECM) is employed Checking for stationarity and cointegration ensures an appropriate VECM model and avoids spurious regression Cointegrated and stationary variables with the same difference order necessitate a regressive VECM model.

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 +α1 x dYt−1+α2 xdYt−2 +…+αnxdYt−1 + β0xdXt + β1xdXt−1+…+ βnxdXt−n + β2nxX t−1+ut

Whereas dYt and dXt are the stationary variables after the difference, and ut is the white noise residuals dYt−n and dXt−n are stationary variables at lags Yt : Dependent variable

NARDL is used in regression analysis involving time series data:

Yt = v +Ф 1 Y 𝑡−1 +Ф 1 Y 𝑡−2 +…+Ф 𝑝 Y 𝑡−𝑝 +P 0 X 𝑡 +P 1 X 𝑡−1 +…+P 𝑞 X 𝑡−𝑞 +u 𝑡 XtA 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

To conduct NARDL asymmetric regression, the xt and yt series must stop t x   x  max(x , 0) x   x  min(x ,

1 with the highest difference of 1 with xt is decomposed into:: x t  x 0

 x   x  In which, xt + and xt - represent the positive and negative effects of the independent variable x with the dependent variable y: t t

Stationary Linear Combination of components: z    y     y     x     x  (4) t 0 t 0 t 1 t 1 t

If zt does not change, yt and xt are asymmetric co-integration The normal

(symmetric) linearity is a special case of (4), obtained when:      and     

Shin et al consider the following limited case:      

Shin et al suggest the asymmetry model on this basis, the NARDL (p, q): p q y    y    (  ' x    ' x  ) 

    j t t t the ECM asymmetry coefficient Shin et al propose the following reduced form based on the expression of the correlation between regression and residuals in expression (6): q1

If expression (8) is substituted for (6), an asymmetric ECM is obtained:

Equation (9) is the NARDL asymmetric regression model demonstrating the nonlinear effects of the independent variable xt on the dependent variable yt in the short run and long run to identify the asymmetric relationship According to Shin et al (2014), the equation describing the relationship between the series can be rewritten as follows:

Whereby, 𝛽 + (∑ 𝑚 𝜃 + ) and 𝛽 − (∑ 𝑚 𝜃 − ) are the long-run (short-run)

𝑖 𝑖=0 𝑖 𝑖 𝑖=0 𝑖 coefficients showing the positive and negative effects of 𝐸𝑋𝑃 𝑡 , 𝐼𝑅𝐵 𝑡 , 𝑈𝑆𝐷/

VARIABLES DESCRIPTIONS OF THE RESEARCH MODEL

3.2.1 The variables of the model of the relationship between fiscal policy and the business cycle

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

Vietnam production GDP GDP index (%) IMF

LNEXP EXP index, logarithm IMF

LNTAX TAX index, logarithm IMF

Public debts LNLIA LIA index, logarithm IMF

According to the research of Debrun and Kapoor (2011), Furceri and Jalles (2016), and Afonso and Jalles

Government spending is a key component of fiscal policy, which is often used to stabilize economic fluctuations caused by the business cycle (Keynes, 1936) To analyze fiscal policy stability, variables such as economic growth (GDP) and government spending are examined, as GDP represents the business cycle and government spending represents fiscal policy.

3.2.2 The variables of the model of public debt on economic growth

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 Public debt Logarit Asymmetric variable

EXP Government Expenditures Logarit Control variable IRB

USD/VND00 USD/VND exchange rate Logarit Control variable

The following particular model has been created:

RESEARCH DATA

3.3.1 Research data of the model of the relationship between fiscal policy and the business cycle Table 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 of Vietnam's gross domestic product (GDP) is derived from the IMF's international financial data Government Spending Variables, GovernmentTax Revenue, and Government 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 theCensus X12 tool, this study isolates the impact of the seasonal element from the data series.

3.3.2 Research data of the model of public debt on economic growth

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 high mean, and a severely skewed Jarque-Bera index.

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 onVietnam's economic growth over the period from the first quarter of 2000 to the first quarter of 2021 Vietnam's gross domestic product (GDP) and lending rate (IRB) are expressed as a percentage; government debt (LIA), government spending (EXP), and USD/VND00 are non-normally distributed propensity variables, thus they must be transformed to logarithmic form.

RESEARCH RESULTS AND DISCUSSION

EXAMINING THE RELATIONSHIP BETWEEN FISCAL POLICY AND

AND THE BUSINESS CYCLE 4.1.1 Tests of the research model

4.1.1.1 Stationary Test for data series

When analyzing time series data, a model is considered credible if the data series used in the research are stationary data series A time series Yt is stationary if three conditions are met: its mean and variance are constant over time, and the covariance between Y t and Yt-s depends only on the distance between the two time points s and not on the time t If the time series are not stationary, the regression may produce erroneous results.

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

If Ho is accepted at significance level α, the time series is non-stationary, whereas if Ho is rejected, the time series is stationary The Dickey-Fuller unit root test was conducted to test the stationary of the series LNEXP and GDP respectively Results indicate that the series does not stop at d = 0

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

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

Most economic time series are non-stationary, but can be made stationary through differencing Time series can become stationary at differing orders; the order in which it stabilizes is known as the order of integration (denoted Yt ~ I(d)) The Dickey-Fuller unit root test assessed the stationarity of the LNEXP and GDP series and found that they are both stationary 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

HypothesizedUnrestricted Cointegration Rank Test (Maximum Eigenvalue)

No of CE(s) Eigenvalue Statistic Critical Value 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 Coefficients (normalized by b'*S11*b=I):

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).

Since the series are stationary with the same order of difference (d=2) and Johansen's test indicates their cointegration, the selected VECM model for examining the relationship between Vietnam's economic cycle and fiscal policy is suitable.

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 Cause EXP

EXP does not Granger Cause LIA

TAX does not Granger Cause EXP

EXP does not Granger Cause TAX

LIA does not Granger Cause GDP

GDP does not Granger Cause LIA

TAX does not Granger Cause GDP

GDP does not Granger Cause TAX

TAX does not Granger Cause LIA

LIA does not Granger Cause TAX

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; At the 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 research model

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 and economic growth

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.

A stationary sequence can be formed by combining non-stationary sequences ECt-1, the residual in this combination, represents an imbalance in period t-1 When such an imbalance arises, it is adjusted by α, an adjustment coefficient, in the short run, ensuring stability in the long 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 long term.

EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMIC GROWTH

GROWTH 4.2.1 Tests of the research model

4.2.1.1 Stationary Test for Data series

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

H 1 : β1 < 1With significance level α = 0.05, if Ho is accepted, the time series is non- stationary; if Ho is rejected, the time series is stationary Applying Dickey – Fuller test 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 the hypothesis H o , thus the series GDP, IRB, USD/VND00, EXP and LIA all do not stop 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 hypothesis H o , so that the series GDP, IRB, USD/VND00, EXP and LIA stop at the first difference 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 NARDL model.

The results show that at the significance level α = 0.05, p -value = 0.0065 < α, so the hypothesis H o is rejected The model has a suitable functional form for inclusion in the regression.

Specification: GDP1 GDP1(-1) GDP1(-2) EXP1_POS

1) IRB1_POS IRB1_NEG IRB1_NEG(-1)

EXP1_NEG(- LIA1_NEG t-statistic F- statistic

Sum of Sq df Mean Squares

Source: Regression Results 4.2.1.3 The Breusch/Pagan Test

To test the Jarque-Bera test of the residuals and the test of variance, use the Breusch/Pagan test.

Table 4.10 The Breusch/Pagan test

Heteroskedasticity Test: Breusch-Pagan-Godfrey

Obs*R-squared 24.91492 Prob Chi-Square(12) 0.0152

Scaled explained SS 48.44180 Prob Chi-Square(12) 0.0000

The results obtained from the Breusch/Pagan test show that at the significance level α = 0.05, p -value 0.0084 < α should reject the hypothesis Ho The model is not subject to variance

Variables constant Std Err t-values P- values

Source: Regression Result from Eviews10

Before estimating the NARDL, several tests, including the Ramsey test for the functional problem and the Breusch/Pagan variance test, were conducted Table

4.11 illustrates the NARDL model The results demonstrate that the model does not contain any of the aforementioned flaws; hence, this study can be utilized to estimate NARDL.

In addition, the F-statistic is greater than t_BDM in Table 4.12, demonstrating that a long-term relationship exists between government debt and economic growth When a nonlinear co-integration estimate is provided, therefore, the long-run connection can be studied further

Table 4.12 Nonlinear co-integration test

Source: Regression Result from Eviews10 4.2.1.5 Short-run and long-run asymmetry testing

The asymmetry test was performed to assess the nonlinear impact of government debt on economic development According to Table 4.13, WLR = 2.034333 (with the associated probability value of 0.0138) and WLR = 16.74844 (with the accompanying probability value of 0.000) indicate that the government debt influence on economic growth is statistically significant in both the short run and the long run.

Table 4.13 Short-run and long-run asymmetry testing Test Asymmetric relationship in the long run Asymmetric relationship in the short run

Results Asymmetrical relationship Asymmetrical relationship

Source: Regression Result from Eviews10 4.2.1.6 The Wald Test

The Wald test determines the asymmetric impact of government debt on economic growth Statistical significance of this impact is observed in both the short and long term at equilibrium level C3C5, supported by a probability value of 0.02062, as indicated in Table 4.14.

Table 4.14 Wald test in the short run and the long run The Wald Test

Source: Regression Result from Eviews10

4.2.2.1 Asymmetrical impact of public debt on economic growth in the long-run

The modeling results presented in Table 4.15 indicate that economic growth can return to long-term equilibrium following each short-term shock to government debt A one percent increase in government debt results in negative variations of 0.209970 percent in economic growth However, a one percent decrease in government debt results in positive variations of 1.174791 percent in economic growth.

Table 4.15 Asymmetrical impact of public debt on economic growth in the long-run

Value Coef Std Err t-Statistic P

Source: Regression Result from Eviews10

4.2.2.2 Accumulation of residuals in the NARDL model

Figure 4.3 Plot of cumulative sum (CUSUM) residuals

Source: Regression Result from Eviews10

Figure 4.4 Plot of adjusted cumulative sum (CUSUMSQ) residuals

Source: Regression Result from Eviews10

As depicted in Figures 4.3 and 4.4, a stability test was conducted on the predicted parameters using Cusum and Cusumsq to determine the statistical significance of NARDL The results demonstrate that Cusum andCusumsq lie within the critical lines with a significance level of 5%, indicating that the model is stable and does not experience unexpected shocks or structural failures.

4.2.2.3 Asymmetric impact of changes in public debt on economic growth

Figure 4.5 Asymmetric cumulative dynamic multiplier graph of public debt and economic growth

Source: Regression Result from Eviews10

Figure 4.6 Asymmetric cumulative dynamic multiplier of USDVND exchange rate on economic growth

Source: Regression Result from Eviews10

To study in depth the asymmetric effect of changes in government debt on short- and long-term economic growth, the author undertakes a cumulative dynamic multiplier analysis derived from the NARDL model The influence of positive and negative changes in government debt on economic development is depicted in Figure 4.3.Economic growth responds more quickly and promptly to an increase in government debt than to a decrease in government debt during the short term In long-term, however, growing government debt has negative impacts on economic growth, while lowering government debt has positive effects on economic growth; this means that an increase in government debt will, to some extent, have a negative influence on economic growth Government debt and economic growth have an inverted U-shaped relationship Consequently, government debt has both short- and long-term asymmetric effects on economic growth In nations with emerging economies, such as Vietnam, budget deficits and rising public debt are nevertheless prevalent In the early phases of an economy's development, the production process requires substantial budgetary capital support However, if the operational and management policies of the economy are ineffective over the long term, the budget deficit, public debt, and economic pressure will likely increase. Increasing government debt has greater negative effects on the economy at this time Consistent with earlier empirical studies: Kumar and Woo (2010); and Reinhart and Rogoff (2007) (2010) Especially in developing nations such as Vietnam, the link between government debt and economic growth is asymmetrical Throughout the whole cycle in question, the difference between the growing and decreasing changes (red dashed line) is statistically significant. Thus, government debt has both short- and long-term unbalanced consequences on economic growth.

Figure 4.5 illustrates the effect of favorable USDVND exchange rate fluctuations on economic expansion.

In the short term, economic growth responds to an increase in the exchange rate more quickly and visibly than it does to a reduction in the exchange rate On the other hand, in the long run, both an increase in the exchange rate and a fall in the exchange rate will have a good effect on the growth of the economy A positive influence on economic growth will also be caused by a neutral exchange rate This is consistent with the State Bank of Vietnam's present exchange rate control system The exchange rate is one of the government's tools for achieving its monetary policy and economic growth objectives.

Budget deficits and rising public debt are nevertheless common in nations with growing economies, such as Vietnam The budget must constantly provide a sizable quantity of capital assistance to the economy's manufacturing process in its early phases However, if the economy's operational and management strategies are ineffective, it will typically drag the budget deficit, increase public debt, and pressure the economy Increasing government debt has greater negative effects on the economy at this time Consistent with prior empirical research byChecherita- Westphal and Rother (2010), Kumar and Woo (2010), and Reinhart and Rogoff (2005), the current study's findings correspond to Checherita-Westphal and Rother

(2010), Kumar and Woo (2010) (2010b) Especially in developing nations such as Vietnam, the link between government debt and economic growth is asymmetrical.

The management of Vietnam's public debt has effectively aligned with the established goals and yielded notable outcomes in reality The significant success made in this accomplishment may be ascribed to the incremental enhancement of the legislative framework and debt management strategies, which have played a role in the steady refinement of the Government's debt This statement illustrates the ongoing improvement in the quality of public debt management by the state in Vietnam These enhancements have been directed towards greater rigor and efficiency,therefore contributing to the development of a more advanced legislative framework for managing state debt.Furthermore, these efforts accord with worldwide standards and practices in debt management Nevertheless,Vietnam's public debt management is subject to significant restraints and limitations First and foremost,notwithstanding the favorable changes in the debt composition, government debt continues to entail a range of inherent hazards Furthermore, the advantageous policies pertaining to borrowing from foreign sources have become less attractive in light of the increased expenses connected with such borrowing The development of the domestic capital market remains relatively weak, while non-bank financial organizations encounter various obstacles.Moreover, the government has challenges in consolidating the allocation of medium and long-term bonds at favorable interest rates Furthermore, the allocation of investment capital, which encompasses concessional foreign loans provided by the government, continues to exhibit a sluggish pace Additionally, it is worth noting that the government is now seeing a rise in direct debt repayments as a result of the maturation of public debt accumulated in previous years This trend is leading to an increase in the proportion of government expenditure allocated towards debt repayment in relation to the overall income generated by the state budget during this time Furthermore, there is a lack of variation in the maturity of government securities issuance Hence, the government's ability to raise funds may encounter distinct challenges throughout certain periods.

Research indicates that public debt has a complex impact on economic growth, with low debt levels promoting growth while high debt levels hinder it Vietnam's current public debt situation was analyzed using the NARDL regression model, revealing a non-linear relationship The model demonstrates that while low public debt positively influences economic growth, increasing debt levels negatively impact growth in Vietnam These findings align with theoretical assumptions and previous literature Consequently, the government must implement measures to establish a business-friendly environment that attracts investment and facilitates sustained economic growth.

The asymmetric impact of public debt on economic growth highlights the importance of improving economic management This can take the form of improved efficiency in the use of resources to effectively reduce the debt burden Policymakers in Vietnam should play an effective role in monitoring the public debt situation and should pay close attention to avoid the risk of debt accumulation Furthermore, there is a need to improve and effectively manage government consumption, as this will lead to an improvement in public debt Vietnam may need to try to follow some basic principles of economic practice, such as always spending to the extent possible As a developing country, Vietnam has a high average level of public debt; therefore, policymakers need to develop a sound financial plan to ensure that accumulated public debt does not cause an overload for future generations The Vietnamese government may need to improve its use of fiscal and monetary policy to reduce its dependence on public debt.

The results are consistent with existing empirical studies showing that the relationship between public debt and economic growth in some countries is inverted-U-shaped The NARDL model indicates that the relationship between public debt and annual GDP growth has a non-linear relationship with a possible critical cut-off point, and exceeding the level of the public debt ratio has a negative effect on growth for developing countries like Vietnam.

CONCLUSION AND POLICY IMPLICATIONS

CONCLUSION

The research has analyzed the fiscal policy tool used during the examined period to state that the premise that developed countries lead a countercyclical policy while developing countries follow a procyclical policy is entirely consistent with the empirical case in Vietnam Consequently, fiscal policy in the majority of emerging nations was aligned with the business cycle over the studied period Public spending, government debt, and tax revenues are examined as possible contributors to the cyclical nature of fiscal policy The results indicate that government spending varies positively with economic growth as indicated by a positive regression coefficient, whereas government debt and tax revenue change negatively with economic growth as indicated by a negative regression coefficient.

Fiscal policy in developing countries follows the economic cycle, as evidenced by empirical studies In Vietnam, a developing nation, economic growth requires increased production resources, particularly physical resources Unlike developed countries with excess potential, developing nations should accumulate wealth to sustain growth.

In times of economic distress, credit constraints and the complexity of credit markets make it difficult or impossible for developing nations to get adequate finance The credit rating of Vietnam, which is already not very high, will be further constrained and at a disadvantage when the economy enters a condition of crisis Therefore, the economy's access to credit will be restricted, and the government must reduce spending and impose a strict fiscal policy.

In developing countries such as Vietnam, the majority of a government's spending goes toward two categories of expenditures: salaries for government employees and investment costs When the economy is in a recession and the government is compelled to reduce spending, it must choose between reducing investment and wages Most governments will be compelled to reduce investments due to pressure On the other hand, long-term government spending is closely tied

108 to economic expansion Without public projects, it is difficult for the government to sustainably raise taxes.

In fact, when the economy is in a recession, the trade-off between governments in developing countries lowering investment and recurrent spending may lose the potential to stimulate future economic growth When the economy is in a recession and the government is forced to implement contractionary fiscal policy, it should proceed with caution when deciding to reduce investment spending.

Vietnam, on the other hand, is a growing nation and will require a lot of capital as the economy expands in order to create and develop The government has an expansionary fiscal policy, but in order to support economic growth, it is important to concentrate on efficiency and investment The government should avoid wasting investing capital by spreading out investments.

Fiscal policy interventions in Vietnam warrant comprehensive examination to identify their impact on economic cycles This study combines qualitative and quantitative analyses, spanning an extended time frame, to assess the relationship between fiscal policy and economic fluctuations As economic and financial markets evolve, the interactions between variables become increasingly intricate Thus, long-term variable analysis is essential for policymakers to gain a comprehensive understanding of the economy and formulate effective fiscal policies This research aims to shed light on the optimal choice of fiscal policy mechanisms that foster Vietnam's economic growth and illuminate its macroeconomic dynamics.

Vietnam is a country with an economy in which the market factor has yet to be firmly defined This study provides significant empirical evidence that the research outcomes in Vietnam are compatible with the theoretical foundations and prior empirical studies on procyclical fiscal policies in developing nations.

The study investigates and analyses the direct influence of public debt on economic growth in Vietnam. The results indicate a disproportional association between public sector debt levels and short- and long-term economic growth The

109 results are consistent with recent empirical studies indicating a nonlinear relationship between public debt and economic development in some nations The NARDL model demonstrates that public debt and yearly GDP growth have a non- linear relationship with the probable critical threshold; surpassing the public sector debt ratio hurts developing economies like Vietnam.

This empirical research of Vietnamese economies demonstrates that public debt has a favorable effect on economic growth at low levels Nonetheless, this influence grows more negative when public debt increases over a certain threshold Consequently, the results are compatible with the hypothesis H1.

The research results are also compatible with hypothesis H2, which is based on the broad theoretical premise that a higher level of public debt is detrimental to economic growth Increasing governmental debt has a detrimental impact on economic expansion The results are consistent with prior empirical evidence regarding developing and emerging nations.

The effect of public debt on economic growth is subjected to research, testing, and empirical evaluation As a result, the NARDL regression model demonstrates that economic growth and public debt have a nonlinear relationship Low public debt has a positive effect on economic growth, while rising public debt has a negative effect on economic growth in Vietnam, as determined through regression analysis The findings align with broad theoretical assumptions and previous research In order to promote economic growth, the government must create a business-friendly environment to attract greater investment.

POLICY IMPLICATIONS

Developing nations have little automated stabilization instruments Because unemployment insurance is unusual Transfers are a negligible portion of the budget In emerging nations, the majority of expenditures are comprised of recurring government expenditures and wages In developing nations, indirect (trade and consumption) taxes are more prevalent than direct taxes (income taxes) In addition, people in these nations have low incomes,therefore the personal income tax contributes a small amount to the government budget Consequently, fiscal policy in developing nations is very procyclical.

In prosperous times, governments in developing nations spend more on investments and social benefits, but they reduce expenditure during recessions In periods of economic expansion, it is also difficult for governments to reduce expenditure on health, education, and infrastructure.

There are numerous reasons why fiscal policy in developing countries tends to be procyclical For instance, government spending (G) grows when aggregate demand (AD) is extremely high Large capital flows poured into the country during the time of economic development, putting pressure on the exchange rate to rise and boosting exports Consequently, these investments improve the government's tax collection The government perceives a rise in the budget due to the wealth effect, higher public investment, and the expansion of state projects During periods of economic expansion, gasoline prices rise, putting pressure on the overall price level Tax revenues also rise, and the government continues to boost spending Additionally, political pressure generates incentives for the government to boost spending in periods of growth.

When capital leaves the economy, the opposite occurs until the economy enters a condition of weakness, leading to a sudden halt The government was compelled to decrease the deficit by cutting spending due to a sharp decline in capital expenditures Consequently, when the economy suffers, G falls, and fiscal policy is procyclical In poor nations, government spending is mostly allocated to two categories: civil servant wages and investment expenditures When a country's economy is in a recession and the government is compelled to slash its budget, it often chooses, for political reasons, to reduce investment rather than wages Most governments are frequently under pressure, and the simplest response is to reduce investment, particularly in emerging nations.

Government spending in the form of investments, such as the construction of roads, bridges, and infrastructure, etc., is correlated with economic expansion over the long term Without these public initiatives, it would be challenging to sustainably raise taxes Occasionally, investment cuts are inevitable, but in developing nations,government spending cuts can stimulate future growth.

The disproportional impact of public debt on economic growth emphasizes the need for enhanced economic management To effectively minimize the debt burden, this can take the shape of enhanced resource utilization efficiency To prevent the risk of debt accumulation, policymakers in Vietnam should play a significant role in monitoring the state of the public debt Additionally, there is a need to enhance and properly manage government expenditures, as this will reduce the public debt The findings of the regression indicate that the money supply into the economy has a asymmetric effect on economic growth, which indicates that the money supply does not fully boost economic growth; rather, an excessive money supply would hinder economic growth Vietnam may need to adhere to some fundamental economic concepts, such as spending as little as feasible Vietnam has a high average public debt as a developing nation, thus authorities must create a strong financial plan to avoid burdening future generations.

In order to minimize its reliance on public debt, the Vietnamese government may need to reform its fiscal and monetary policy.

In order to foster economic growth and address current account imbalances, developing countries are urged to borrow from wealthier nations However, the weight and dynamics of external debt can have a negative impact on the financing of economic development in emerging countries If the cost of repaying debt is low relative to the return on investment, it can increase investment and accelerate economic growth, however if the expenses are high, growth would stall Vietnam borrows from internal and external sources to address savings-investment gaps, budget deficits, and other gaps to boost economic growth and macroeconomic factors like investment, consumption, education, and health.

Annual interest payments on public debt hinder economic expansion Emerging nations' efforts to substitute external debt with domestic debt have created the problem of mounting domestic debt, which has severe economic implications Domestic loan delinquencies lead to interest rates exceeding foreign debt, consuming a significant portion of government revenue Additionally, competition between the government and private sector for borrowing may arise, with detrimental effects on private investment and economic growth.

112 and the private sector, resulting in private sector investment being crowded out This is a regular occurrence in developing nations such as Vietnam.

The topic of debt and economic growth in Vietnam implies that there is a direct correlation: more debt is detrimental to economic growth In addition, seeking a bigger public debt to encourage economic growth is a poor policy choice, as it might result in higher taxes, a decline in private investment, and an increase in consumer spending. Moreover, the data indicate that for some countries in transition, such as Vietnam, the current level of debt may have had a negative impact on GDP growth, as the average debt-to-GDP ratio is currently above the threshold for GDP public debt Countries with debt levels above the threshold should consider decreasing their public debt to ensure that their national revenue is sufficient to repay the debt If a country is insolvent and need more financial resources, increasing the tax rate to replace the debt is not a viable alternative.

This module informs governments in transitioning nations about the asymmetric impact of public debt on economic growth, the point at which public debt becomes a drag on growth The study also warns transition country authorities that targeting higher debt levels to enhance growth is not a feasible policy option Countries in transition with debt levels exceeding their GDP must take measures not just to stabilize their public debt, but also to reduce it over the medium and long term Therefore, the only prudent strategy for policymakers of countries is to manage public debt below GDP in order to absorb external shocks that are unpredictable and may impact economies.

Countries with high debt levels must address fiscal issues promptly to prevent future economic challenges The negative impact of debt on economic growth necessitates prudent fiscal policies Regular evaluation of debt levels is crucial to ensure a sustainable debt-to-GDP ratio and successful borrowing for public purposes Failure to manage debt effectively can hinder economic growth.

LIMITATIONS OF THE RESEARCH

The properties of the model determine the research outcomes The correctness of the model is highly dependent on the factors incorporated into the model and the stage of data collecting Consequently, the selection of Vietnam as a research country cannot avoid the following challenges and restrictions: Data on fiscal policy and Vietnam's economic growth in the periods before 2000 were incomplete, limiting the inclusion of observations in the model and its tests The majority of domestic studies are qualitative Therefore, a comprehensive and detailed comparison of research results with those of other studies will be challenging.

In addition, there are a few shortcomings with the study The model definition does not account for the possibility of data outliers, which could have influenced the results In addition to the relationship between public debt,public sector spending, and economic growth, the study could be expanded to find mechanisms via which the public debt impact is indirectly transferred on growth.

Excessive spending and insufficient revenue lead to budget deficits in developing nations Governments finance deficits through money printing, debt, or surpluses Public debt arises when borrowing is prioritized over tax increases This debt can be internal (domestic lenders) or external (overseas lenders) Debt accumulation and repayment capacity have been crucial factors in output growth in emerging countries since the 1980s Poor economic management and governance issues further contribute to public debt and constrain growth in developing economies.

The influence of governmental debt on the expansion of the Vietnamese economy was the subject of the research presented in this thesis The objective is to determine if government debt contributes to economic growth or has a detrimental effect on the economy The findings reveal that government debt has a considerable and asymmetric effect on sustained economic growth in the short and long run Government debt should support short- and long-term economic growth through funding production Consequently, government debt should not constitute a burden on the economy when the high amount of debt exceeds the capacity to repay.

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APPENDIX EXAMINING THE RELATIONSHIP BETWEEN FISCAL POLICY AND

STATIONARY TEST OF DATA SERIES

COINTERGRATION TEST

CAUSALITY TEST

LAG ORDER SELECTION CRITERIA

THE STABILITY TEST OF THE MODEL

THE VECM

IMPULSE RESPONSE FUNCTION

DECOMPOSTION

APPENDIX EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMIC

UNIT ROOT TEST

DATA DESCRIPTION

THE ECR TEST

THE NARDL MODEL

THE BREUSCH TEST

THE LONG RUN AND BOUNDS TEST

THE RAMSEY TEST

THE WALD TEST

Test Statistic Value df Probability t-statistic -1.276413 68 0.02062

Null Hypothesis: C(3)=C(4)+C(5) Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std Err.

Restrictions are linear in coefficients.

PLOT OF CUMULATIVE SUM OF RESIDUALS CUSUM

STABILITY TEST OF THE MODEL

4.1.2 Results of testing the relationship between fiscal policy and economic growth

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.

With an ECt-1 value of -0.910403, the dependent variable will revert by 91% to the equilibrium level if the previous period imbalance is 1 unit This implies a time frame of more than two periods to achieve equilibrium restoration.

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 long term.

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, and the government increases both public debt and tax collections to cover the deficit.

Variance decomposition in the VECM model identifies the contribution of individual time series to forecast errors, complementing impulse response functions This analysis highlights the significance of fiscal policy in driving business cycles Government expenditure (EXP) accounts for approximately 3% of GDP variance, with its impact persisting over time Government debt volatility exceeds 4% of GDP volatility Tax revenue significantly influences economic growth, contributing over 10% to output fluctuations These findings align with Vietnam's current fiscal policy, which emphasizes tax collection as a primary revenue source.

Period S.E D(GDP,2) D(EXP,2) D(LIA,2) D(TAX,2)

The study results are consistent with earlier research Fiscal policy in developing countries is pro-cyclical (Acemoglu et al., 2013; Fatas and Mihov, 2013) Developing nations frequently lack stabilizing instruments like unemployment insurance and social benefits The majority of developing nation expenditures consist of recurring government expenses and wages In developing nations, indirect (trade and consumption) taxes are more prevalent than direct taxes (income taxes) In addition, people in these nations have low incomes, therefore the personal income tax contributes a small amount to the government budget Consequently, fiscal policy in developing nations is very procyclical.

In emerging economies such as Vietnam, the government increases expenditure on investments and social benefits during booming periods and reduces spending during recessions In periods of economic expansion, it is also difficult for governments to reduce expenditure on health, education, and infrastructure When the economy is in a fragile position The government was compelled to decrease the deficit by cutting spending due to a sharp decline in capital expenditures Therefore, when the economy suffers, fiscal policy will reduce government spending.

4.2 EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMIC

GROWTH 4.2.1 Tests of the research model

4.2.1.1 Stationary Test for Data series

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

H 1 : β1 < 1With significance level α = 0.05, if Ho is accepted, the time series is non- stationary; if Ho is rejected, the time series is stationary Applying Dickey – Fuller test 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 the hypothesis H o , thus the series GDP, IRB, USD/VND00, EXP and LIA all do not stop 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 hypothesis H o , so that the series GDP, IRB, USD/VND00, EXP and LIA stop at the first difference 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 NARDL model.

The results show that at the significance level α = 0.05, p -value = 0.0065 < α, so the hypothesis H o is rejected The model has a suitable functional form for inclusion in the regression.

Specification: GDP1 GDP1(-1) GDP1(-2) EXP1_POS

1) IRB1_POS IRB1_NEG IRB1_NEG(-1)

EXP1_NEG(- LIA1_NEG t-statistic F- statistic

Sum of Sq df Mean Squares

Source: Regression Results 4.2.1.3 The Breusch/Pagan Test

To test the Jarque-Bera test of the residuals and the test of variance, use the Breusch/Pagan test.

Table 4.10 The Breusch/Pagan test

Heteroskedasticity Test: Breusch-Pagan-Godfrey

Obs*R-squared 24.91492 Prob Chi-Square(12) 0.0152

Scaled explained SS 48.44180 Prob Chi-Square(12) 0.0000

The results obtained from the Breusch/Pagan test show that at the significance level α = 0.05, p -value 0.0084 < α should reject the hypothesis Ho The model is not subject to variance

Variables constant Std Err t-values P- values

Source: Regression Result from Eviews10

Before estimating the NARDL, several tests, including the Ramsey test for the functional problem and the Breusch/Pagan variance test, were conducted Table

4.11 illustrates the NARDL model The results demonstrate that the model does not contain any of the aforementioned flaws; hence, this study can be utilized to estimate NARDL.

In addition, the F-statistic is greater than t_BDM in Table 4.12, demonstrating that a long-term relationship exists between government debt and economic growth When a nonlinear co-integration estimate is provided, therefore, the long-run connection can be studied further

Table 4.12 Nonlinear co-integration test

Source: Regression Result from Eviews10 4.2.1.5 Short-run and long-run asymmetry testing

The asymmetry test was performed to assess the nonlinear impact of government debt on economic development According to Table 4.13, WLR = 2.034333 (with the associated probability value of 0.0138) and WLR = 16.74844 (with the accompanying probability value of 0.000) indicate that the government debt influence on economic growth is statistically significant in both the short run and the long run.

Table 4.13 Short-run and long-run asymmetry testing Test Asymmetric relationship in the long run Asymmetric relationship in the short run

Results Asymmetrical relationship Asymmetrical relationship

Source: Regression Result from Eviews10 4.2.1.6 The Wald Test

The Wald test is employed to evaluate the asymmetric effect of government debt on economic growth As per the findings presented in Table 4.14, at the C3C5 equilibrium level (with a corresponding probability value of 0.02062), the influence of government debt on economic growth is statistically significant in both the short and long term.

Table 4.14 Wald test in the short run and the long run The Wald Test

Source: Regression Result from Eviews10

4.2.2.1 Asymmetrical impact of public debt on economic growth in the long-run

The modeling results presented in Table 4.15 indicate that economic growth can return to long-term equilibrium following each short-term shock to government debt A one percent increase in government debt results in negative variations of 0.209970 percent in economic growth However, a one percent decrease in government debt results in positive variations of 1.174791 percent in economic growth.

Table 4.15 Asymmetrical impact of public debt on economic growth in the long-run

Value Coef Std Err t-Statistic P

Source: Regression Result from Eviews10

4.2.2.2 Accumulation of residuals in the NARDL model

Figure 4.3 Plot of cumulative sum (CUSUM) residuals

Source: Regression Result from Eviews10

Figure 4.4 Plot of adjusted cumulative sum (CUSUMSQ) residuals

Source: Regression Result from Eviews10