Asymmetric impact of public debt on economic growth – empirical evidence from vietnam doctoral dissertation of finance and banking

THERATIONALEOFRESEARCH

Despite the passage of several years since the global financial crisis, economic growth remains sluggish in many economies Medium-term growth projections have been downgraded since 2011, reflecting uncertainty about the future of economic growth Notably, public debt has surged to record levels in various developing market economies, raising questions about the relationship between fiscal policy and the economic growth cycle.

Fiscalpolicy(governmentspending,taxes,subsidies,etc.)andmonetarypolicy(mo neysupply,interestrates,exchangerates,etc.)areutilizedbythegovernmenttointervenei ntheeconomyduringperiodsofrecessionorr a p i d growth Those policies are separated into pro-cyclical and counter-cyclical stagesbased on the recession or economic growth cycle A pro-cyclical fiscal policy isdefinedasthepolicyaimstobalancethegovernmentbudget.Forinstance,ifther eis a budget deficit, it is necessary to increase tax revenues and decrease governmentspending A fiscal strategy with the purpose of restoring output to its potential leveliscountercyclical.Toattainpotentialoutputlevelsduringarecession,thegovernmen tcontinuestoincreasegovernmentspendingandcuttaxreceipts(Keynes,1936).

Governments in developed nations frequently employ a countercyclical fiscalpolicy This can be explained by an expansionary fiscal policy during economiccontractionandacontractionaryfiscalpolicyduringeconomicexpansion.Theauto mated stabilizing instruments are used by developed countries to achieve thecountercyclicalfiscalpolicy.Whenunemploymentishigh,u n e m p l o y m e n t ins urance and social transfer payments are increased As declining personal incomereduces government tax collection, tax policy can potentially reverse the cycle.While the economy exhibits signals of contraction, expansionary fiscal policy isenacted(Acemogluetal., 2013; Fatas and Mihov, 2013).

While macroeconomic policy in developed nations is primarily targeted atstabilizingtheeconomiccycle,countercyclicalfiscalpolicyisimplementedtoaccumul ate in the expansion period In developing nations, the macroeconomicpolicy is procyclical Those economies frequently increase investment and publicspendingthroughouttherecoveryphaseoftheeconomytocatchupw i t h developi ng nations The government, particularly the local authorities, desires toincrease spending when the economy is expanding Developing nations frequentlylack automatic stabilization instruments during economic recession For instance,unemployment insurance payouts are infrequent, and social transfers represent anegligible portion of the budget In developing nations, the majority of expendituresare comprised of government consumption and wages Additionally, indirect taxes(trade and consumption taxes) sometimes replace direct taxes in emerging countries(incometaxes).Inorderforthegovernmenttoachieveitsl o n g - t e r m macroeconomic management objectives,itm u s t e m p l o y f i s c a l p o l i c y e f f e c t i v e l y and at the appropriate moment during a recession or rapid economic expansion(TalviandVegh,2005).

Throughtheuseoffiscalpolicy,thegovernmentintervenestorestoreeconomicequ ilibrium.Anunfavorableimpactontheeconomycanhavebothimmediateandlong- termrepercussionsifthewrongdecisionismade.Consequently, it is crucial to determine the most effective fiscal policy instrumentsrequiredtosupporteconomicgrowth.

In order to fund global government budgets and promote economic growth,sustainable funding policies are needed Frequently, when tax collections fall shortof projected government spending, there is no other option than to increase taxes orborrow money either domestically or internationally (Owusu-Nantwi and Erickson,2016) When governments employ borrowing as an alternativeto taxation, thisresults in public debt (Ogunmuyiwa, 2011).Consequently, public debt consists ofthe government's short-and long- terml o a n s u s e d t o s u p p o r t p u b l i c e x p e n d i t u r e s due to insufficient public revenue As a result of the worldwide economic crisisfollowingWorld War II, many economies (including wealthy and 174 emergingnations)wereforcedtoborrowlocallyorinternationallytopaytheirbudgetd eficit.

These efforts have led to the accumulation of public debt in many nations, causingeconomicrecessionandfinancialcrisesi n t h e e a r l y 2 0 0 0 s i n n u m e r o u s developedanddevelopingnations(DonayreandTaivan,2017).

Thegovernmentusesthepublicdebtasakeytooltofinancenationaldevelopment. The use of debt to finance expenditures that will ultimately increaseproductivity and stimulate the economy However, empirical research on publicdebt, such as those conducted by Reinhart and Rogoff (2010) and Panizza andPresbitero (2014), indicate that public debt will have a negative effect on economicgrowth once it exceeds a particular threshold According to Mankiw (2013), thegovernment expenditure deficit surpasses the self-accumulation that can be paid bydomestic and international businesses Public debt encompasses both internationaland domestic obligations Rahman (2012) defines public debt as a circumstance inwhichthequantityofvaluabledocumentspossessedbythegovernmentisinsufficient to compensate the deficiency in previous expenditures According tomacroeconomic theory, a government debt utilized to pay spending in productiveareas such as health,education, and nutrition will have abeneficial impact oneconomicgrowth (Freeman, &Webber 2009).

If the rate of return on government debt is higher than the rate at which thegovernment receives paid for its services, then the country will gain from the debtincurred by the government, and vice versa Presently, rising national debt is aglobal phenomenon Total public debt has long been cited as a major subject ofconcern by both financial and monetary policymakers Public debt, particularly debtspendingprograms,playsavitalroleinachievingrapideconomicgrowth.According to Elmendorf and Mankiw (1999), debt can increase aggregate demandandoutputintheshortterm,butlowercapitalandoutputinthelongterm.Governm entsrelyheavilyonpublicdebttofinanceanation'seconomicdevelopment Debt is utilized to fund expenditures that will ultimately increaseproductivity and stimulate economic growth Nonetheless, empirical research onpublicd e b t , s u c h a s t h o s e c o n d u c t e d b y R e i n h a r t a n d R o g o f f ( 2 0 1 0 ) a n d

(2013), the government expenditure deficit surpasses the self-accumulation that canbe paid by domestic and international businesses Public debt consists of both localand international debt Rahman (2012) defines public debt as a circumstance inwhichthequantityofvaluabledocumentspossessedbythegovernmentisinsufficient to compensate the deficiency in previous expenditures According tomacroeconomic theory, a government debt utilized to pay spending in productiveareas such as health,education, and nutrition will have abeneficial impact oneconomicgrowth (Freeman, &Webber 2009).

It is extremely difficult for a nation to create a budget surplus; hence, publicdebt is unavoidable (Adom, 2016) However, unsustainable levels of public debtmight inhibit economic growth (Adom, 2016) Unsustainable public debt hinderseconomicgrowthbyreducingacountry'scompetitivenessandincreasingitsfinan cial markets' sensitivity to international shocks (Cochrane, 2011a; Castro et al.,2015). This also means that, while borrowing to support public spending is notnecessarily a bad thing, it can have a negative influence on economic growth if it isnotadequatelycontrolled.The1970sand1980sworldwidedebtcrisesweretriggered 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 projectswithouttheabilitytomeetdebtcommitmentsontime,debtcollectionandrepayme nthavebecomeacentralconcernforemergingandlessd e v e l o p e d countries

(Marquez, 2000) There are still conflicting conclusions regarding howpublic debt affects economic growth, regardless of whether it rises or falls Othersacademics find a positive, some a negative, while others find no correlation betweenpublicdebtandeconomicgrowth underdifferent economic conditions Accordingtoeconomists,publicdebtisnotaproblem;rather,theissueisthedebt'smism anagement Empirical evidence suggests that if adequate laws are in place andcan 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 asignificant impact on the economy (Kumar and Woo, 2010) The mismatch betweentheoryandpr act ice on th e relationship bet wee n publicde bt andecono micgrowth has also contributed to the disparities in policy approaches among the examinednations.

Vietnam's national debt is thought to be under control, although it may stillposeabarriertoitsambitionsforeconomicdevelopment.Highdebtcansignificantly effect economic growth and development Thus, public debt has bothbeneficial and negative consequences on the economies of nations, causing severalobstacles and difficulties High levels of debt might hinder economic growth anddevelopment. This topic has always attracted a great deal of attention due to thedifficultiesinvolvedinanalyzingthechallengesofeconomicgrowthandgovernmental debt.

The impact of government interventions on economic growththroughdebt,taxation,andspendingcontinuestobeanimportantsubjectofeconomi c policy in the global economy Although the origins and effects of publicdebto n t h e e c o n o m i e s o f d e v e l o p i n g n a t i o n s a r e s t i l l d e b a t a b l e , i t i s c l e a r t h a t public debt has a negative impact on economic growth Recent financial crises inboth developed and developing nations, as well as vast disparities in economicgrowth rates among world economies, have led to a new link between public debtand economic growth The fact that Asian countries are the greatest borrowersamongemergingeconomiesmeansthattheissueofrisingpublicdebtisaparticu larly critical issue in these countries This is because of the fact that Asiancountries are located in the region with the most rapidly developing economy Asianeconomies also had two major crises during the time analyzed, the Asian financialcrisis of 1998 and the global financial crisis of 2008 which boosted the public debt-to-GDPratiointhesecountries.

Unlike other studies in the world, the relationship between public debt andeconomic growth is mainly carried out in developed countries or countries with aclearly recognized market economy Domestic studies mainly find thresholds or juststop analyzing the situation between public debt and economic growth However,the thesis selected Vietnam as the research sample, with the economic operatingmechanismunder themanagement of the state havingm a n y d i f f e r e n c e s c o m p a r e d to other countries On the other hand, from theory and empirical studies, it is shownthatoverusingandmaintainingahighpublicdebtwillhavenegativeeffectson the economic growth of countries Therefore, the thesis does not search for thresholdsbut estimates the level of asymmetric impacts, including the specific positive andnegativeimpactsofpublicdebtoneconomicgrowth.Thistopic'sprimarypu rposeis toevaluatetheasymmetricinfluenceofpublicdebtoneconomicgrowthinVietnam based on the preceding practice and previous empirical research The studyexamineswhetherdebtisabarriertoeconomicgrowthinVietnamandhowgovernment loans affect the short- and long-term sustainability of the economy Thefindings of this study will provide empirical evidence regarding the impact of publicdebtonthesustainablegrowthoftheVietnamese economy.

RESEARCHOBJECTIVES

The purpose of this study is to examine the causal relationship between fiscalpoliciesandeconomiccycles,servingasthebasistoquantifythea s y m m e t r i c impact of Vietnam's governmental debt on economic growth The conclusions ofthe asymmetric impact of public debt on economic growth serve as the foundationforrecommendingfiscal policies forVietnam.

Toaccomplishtheobjective,the researchmustaddress thefollowingspecific aims:

(4) Analysingth eef fe cts andre per cuss io ns o f the po li cy ofp ub li cde b t on theexpansionoftheVietnameseeconomy.

OBJECTS,SCOPEANDMETHODOLOGYOFTHERESEARCH

This study investigates the nexus between fiscal policy and economic growth in Vietnam from Q1 2000 to Q1 2021 Using quarterly data from the IMF's Financial Statistics, the research examines the relationship between total tax income, government debt, government spending, and economic growth To address the non-normal distribution of variables such as GDP, money supply growth, lending rate, and government spending, logarithmic transformations are applied Additionally, the exchange rate is converted to a natural logarithmic form by dividing the year's rate by the base year rate for the first quarter of 2000.

After using the VECM model to test and estimate the relationship betweenfiscal policy and the business cycle of Vietnam, the research methods utilized arequantitative.NARDLusedanasymmetricregressionmodeltoexaminethedisproporti onate effect of public debt on economic growth in Vietnam On thispremise, the thesis makes proposals for the development of policies concerningVietnam'snationaldebt.

Thisthesisutilizesthe VECM (VectorError Correction Model)fram eworktoevaluatethecorrelationbetweenfiscalpolicyandtheeconomiccycle.T h e VEC

M model lacks the ability to differentiate between endogenous and exogenousfactors, hence rendering it appropriate for examining the causal association betweenfiscal policy and the economic cycle throughout both the short and long term.

Acrucialp re re qu isi te f o r e m p l o y i n g t h e V e c t o r E r r o r C o r r e c t i o n M o d e l (

V E C M ) is that the data series must possess the same level of integration through differencingandexhibitcointegration.ThethesisemploystheNARDL(NonlinearAutor egressive Distributed Lag) model to investigate the asymmetric effects ofpublic debt and the attributes offiscal policyon economic growth,specificallyi n thecontextoftheeconomiccycleinVietnam.Thisanalysisisbase dont h e observed level ofcausality between fiscalpolicy andthe economic cycle.Theprimary requirement for using the NARDL model is that the data series shouldexhibitintegration atthemostelevatedlevel ofdifferencing,specificallyoforder 1.

THESIGNIFICANEANDCONTRIBUTIONSOFTHERESEARCH

On the basis of theory and empirical studies on the influence of public debton economic growth, as well as the current research gap, this study makes thefollowingcontributionsand presentsnewpoints:

(1) The paper contributes to the application of theoretical foundations onpublic debt and economic growth to the experience of Vietnam, a country whoseeconomyistransitioningtothemarketmechanismandcontainingnumerousproble matic components Theoretical underpinnings are then applied to the researchsample,whichiseitherthegroupofindustrializedcountriesorthegroupofdevelopin g countries The selection of Vietnam as a research sample will contributeto elucidating issues of scientific theory when applied to economies with distinctcharacteristics, such as Vietnam; whether or not the results are consistent with thetheoryandearlier empiricalstudies.

(2) Domesticresearchreliesprimarilyonqualitativeanalysis,whileinternationa lstudiesutilizethelinearorthresholdapproach.Thisa r t i c l e incorporates a model of the asymmetric impact of public debt on economic growthinVietnam.Second,theauthorrewritesthestudyundermorevolatilea n d integrat edr e a l - w o r l d c o n d i t i o n s , w h e r e c a p i t a l f l o w s a r e h i g h l y l i b e r a l i z e d , currencyratesaremorevolatile,andglobaleconomiesaredynamic.Theeconomiesofthec ountrieshaveexperiencednumerousfluctuationsinrecentyears.

(3) Thisstudycontributesintwowaystotheempiricalevidencenowaccessible. First, only a handful of empirical studies have examined the public debt-to- GDPratiothresholdanditsimpactoneconomicgrowthindevelopingandtransitionalnationslik eVietnam.Second,thetheoryhasdemonstratedthatVietnam'spublicdebthasaasymmetri c effectoneconomicgrowth.

RESEARCHCONTENTS

Chapter1: I n t r o d u c t i o n o f T he re se a r c h.I n t h i s par t, t h e to pi c w i l l c l a ri fy the overview contents of the research topic including: necessity of the research,research objectives, research questions, research object and scope, research methodsandsignificance of thetopic.

Chapter 2: Theories and Literature Review The relationship between fiscalpolicy and the economic cycle is discussed in Chapter 2 The topic will provide asummary of the theories and experiments underlying the connection between publicdebt and economic growth Regarding the theoretical literature, four schools ofthought(Classical,Keynesian,Ricardian,andModernMonetization)h a v e presente d varying explanations regarding the causal relationshipb e t w e e n p u b l i c debtandeconomicgrowth.

Chapter 3: Research Methodology The topic describes the research model,modelvariables,dataused,anddataprocessingprocedures.Inthef o l l o w i n g c hapter, the study uses the VECM model to test the relationship between fiscalpolicy and the economic cycle ofVietnamand the NARDLmodel to test theasymmetricimpactofpublicdebtonVietnam'seconomicgrowth.

Chapter 4: Research results and Discussion.On that basis, the study uses theVECM model to test Vietnam's pro-cyclical fiscal policy A dynamic regressionmodelw i t h a s y m m e t r i c a l d i s t r i b u t i o n l a g ( N A R D L ) i s b e i n g u s e d t o i n v e s t i g a t e whetherpublicdebthasanasymmetricallynegativeinfluenceonVietnam'seconomicgro wth.

Chapter 5: Conclusions and Policy Implications Chapter 5 summarizes theresults of Chapter 4 to answer the research questions In addition, the study alsopointsoutsomepolicyimplicationsoffiscalpolicyandeconomicgrowthinVietnam.

THEORIESOFFISCALPOLICYANDBUSINESSCYCLE

Conceptsrelevanttotheresearchproblems

Fiscal policy is a subset of macroeconomic policy that influences economicactivitythroughalterationsingovernmentexpenditureand/ortaxation.T h e p urposes of fiscal policy are to: Mobilize financial resources to meet the state'sspending needs; Promote economic restructuring, and ensure stable and sustainableeconomic growth; Contribute to the stabilization of the market and commodityprices; and Redistribute social income among different classes of the population(FurceriandJalles,2016).

Fiscal policy, involving government expenditure and revenue adjustments, plays a crucial role in economic activity Its macroeconomic effects include stimulating growth through spending or tax cuts Fiscal policy aims to finance government needs, promote economic restructuring, ensure stable economic growth, stabilize markets and commodity prices, and redistribute income among different population groups, as outlined by Furceri and Jalles (2016).

The government intervenes in the economy via fiscal policy (governmentspending, taxes, subsidies, etc.) and monetary policy (money supply, interest rates,exchangerates,etc.)duringperiodsofeconomicrecessionorrapidgrowth.Accordin gto th er ecess io n o r eco no mic gr ow th c y c le , fi sca lan d m o n e t a r y p o l i c y are split into procyclical and countercyclical stages Pro-cyclical fiscal policy is afiscal policy that seeks to balance the budget To balance the budget when there is adeficit, it is important to increase tax collection and reduce government spending Acountercyclical fiscal policy is a policy with the objective of restoring output to itspotentiall e v e l I n o r d e r t o a c h i e v e p o t e n t i a l o u t p u t l e v e l s d u r i n g a r e c e s s i o n , t h e governmentcontinuestoraisegovernmentspendinganddecreasetaxreceipts(Keynes,19 36).

Indevelopednations,governmentsfrequentlyemployac o u n t e r c y c l i c a l fiscal strategy, i.e an expansionary fiscal policy while the economy is in recessionand a contractionary fiscal policy when the economy is in expansion The fiscalpolicies of developed nations are countercyclical because of automated stabilizinginstruments.Whenunemploymentishigh,unemploymentinsuranceandsocia ltransfer payments are increased As declining personal income reduces governmenttax collection, tax policy can potentially reverse the cycle While the economyexhibits signals of contraction, expansionary fiscal policy is enacted (Acemoglu etal,2013; Fatas andMihov, 2013).

While the primary objective of macroeconomic policy in developed countriesis to stabilize the economic cycle, countercyclical fiscal policy is implemented toaccumulateduringtheexpansionphase.Incontrast,developingcountrymacroeconomi c policy is pro-cyclical The fundamental reason is that, in order tocatchupwithdevelopedcountries,emergingeconomiesfrequentlyincreaseinvestment andpublicspending,particularlywhentheeconomyisr e c o v e r i n g Whentheecono myisexpanding,thegovernment,particularlythel o c a l government, desires to increase spending During economic downturns, developingnationsfrequentlylackautomatedstabilizationinstruments.Unemployment insurance payouts are infrequent, and social transfers represent a negligible portionofthebudget.Themajorityofspendingindevelopingnationsisallocatedtogovernme nt consumption and wages In emerging nations, indirect taxes (trade andconsumptiontaxes)frequentlyreplacedirecttaxes(incometaxes).Inordertoachieve its long-term macroeconomic management objectives, the government mustemploy fiscal policy effectively and at the appropriate moment during a recession orrapideconomic expansion. VeghandTalvi,2005).

The business cycle explains the expansion and contraction of an economy.Theeconomiccycleistheeconomy'sresponsetorealshocks,suchastechnolo gical advancements,naturaldisasters,andconflict.Negativeorpositiveeconomicfluctuations canspread andgeneratecyclefluctuations(Kydland& Edward,1982).

In the past two decades, the majority of nations have experienced economiccyclicality as a result of the 1997 and 2008 financial crises In reality, economiccycles are unpredictable and erratic There is no formula or approach for predictingthe time and duration of business cycles with precision Governments continue toexplore whether fiscal and monetary policy measures will be deployed to regulatethe economy more steadily, and research into the economic cycle is conducted in anefforttolimit economic crises andoverheating.

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

Theoriesof FiscalPolicyandBusiness Cycle

AccordingtoKeynesiantheory,pricesorwagesrepresenti n s t a n t a n e o u s pri ce adjustments that are not fully responsive to fluctuations in demand theWiththesupportofthe Countercyclical fiscalpolicy,theeconomycanrecoverfromrecessions and expansions more swiftly and smoothly Consequently, fiscal policyshould actively smooth and support the business cycle by decreasing taxes andincreasing spending, thereby increasing aggregate demand in downward stage, andby reducing spending and increasing savings in upward stage Although this isperhaps less relevant for developing countries, where social safety is less developed(Thornton, 2008).

From a neoclassical perspective, the objective of fiscal policy should be tominimize deviations Barro's (1979) hypothesis states that in order to assure thatspendingshocksortaxshocksaretransitory,taxratesmustbemaintainedatconstant levels throughout the business cycle Therefore, the budget balance shouldhave a positive correlation with output, given that it absorbs changes to tax revenuesinduced by tax shocks as well as changes to other incomes and expenditures (FatásandMihov, 2009,Chari et al., 1994).

Keynes (1936) claimed that relying entirely on the private sector would notgeneratesufficientsavingsforeconomicdevelopmentindevelopingcountries.Theref ore,Keynesianeconomistshavebeenurginglow-incomedevelopingcountries (LDCs) for a considerable amount of time to raise their tax burdens andreduce their recurrent spending in order to boost their savings in the governmentbudget.In addition,they encourage thegovernments of developing nations toenhancet h e i r p u b l i c i n v e s t m e n t s f u n d e d b y f o r e i g n l o a n s T h e s e p o l i c i e s w e r e prevalenti n t h e 1 9 6 0 s , 1 9 7 0 s , a n d 1 9 8 0 s i n d e v e l o p i n g c o u n t r i e s H o w e v e r , t h e r e are a number of problems with these policy recommendations, including a lack ofspecificity in analyzing the relationship between macroeconomic variables and adisregard for fundamental features of fiscal policy, such as the efficient allocation offinancial resources, equitable distribution, and long-term stability, while placing anexcessiveemphasisonshort- termgrowthobjectives.TheKeynesiantheorydisregards the fact that the government cannot inject purchasing power into theeconomy prior to diminishing it via taxes and debt The Keynesian hypothesis wasquestioned when the global economy entered a recession in the 1970s and when taxcutsandausterityspending ledtoan economicboominthe1980s.

Keynesian economics asserts that governments should intervene in economic downturns by increasing government spending and decreasing taxes This intervention aims to elevate aggregate demand and stimulate the economy Such spending may be funded through tax revenues or government borrowing, potentially leading to budget deficits and increased debt However, these measures may also have adverse effects, including budget deficits, decreased government spending, and reduced marginal efficiency of capital Additionally, they can contribute to inflation and exacerbate the government's debt burden.

ContrarytotheKeynesianperspective,manyeconomistsbelievedf o r decadesth atreducingthebudgetdeficitwasthe"magicelixir"foreconomicexpansion They contend that reducing government expenditure will reduce thebudgetdeficit,henceloweringinterestrates,increasinginvestment,boostingproducti vity,andultimatelypromotingeconomicgrowth.Ifther e l a t i o n s h i p between the aforementioned factors is close, this argument is valid and fiscal policyshould focus on addressing the deficit problem There are, however, reasons tobelieve that the relationship between budget deficit, interest rate, investment, andgrowth is exaggerated However, neither school stresses the magnitude of budgetexpenditures Keynesian economists are normally concerned with big quantities ofgovernmentexpenditure,buttheyarealsounconcernedwithlittleamountsofgovernme nt spending so long as they can be increased as necessary to rescue thestagnationeconomy.Today,themajorityofeconomistsconcurthattherearesituations inwhichgovernmentspendingcutsareadvantageoustoe c o n o m i c growth,aswellass ituationsinwhichgovernmentexpenditureincreasesarefavorable to economicg r o w t h I n t h e 1 9 3 0 s a n d 1 9 6 0 s , i d e a s o f m a r k e t f a i l u r e l e d totheestablishmentofenormousgovernmentspendingprogramsundertheframewo rk of fiscal policy However, in the 1970s and 1980s, the downsides ofGovernmentspendingprogramsbegantoshow,compellingeconomistsa n d political scientists to research government failures Therefore, the market frequentlyfails,a n d t h e g o v e r n m e n t r a r e l y s u c c e e d s i n o v e r c o m i n g m a r k e t f a i l u r e s A m o n g theprimaryreasonsforgovernmentfailureare:Slowpolicyissuance andimplementation results from limited information, limited control over the privatesector, bureaucracy, and constraints of the political consultation process (Le MaiTrang,2018).

Themostidealform,accordingtocurrentcontempotaryeconomictheory,isa mixed economy with a balanced role for the government and the market (Mankiw,2005) The government manages the market using tax, expenditure, and regulatoryprogramswi th in ama rk et ec o n o m y m o d e l t ha td e c i de s pr ice san d o u t p u t Ma r k e t andGovernmentarebothdecisivevariables.Managingtheeconomywithoutgovernment andthemarketisliketo"clappingwithonehand."Themarketeconomy increases the efficiency of production and distribution of products, but italso has drawbacks that necessitate government intervention to assure efficiency,fairness,andstability.Theendogenousgrowthmodelhasbecomeanessentialt heoretical foundation for contemporary fiscal policy (Barro, 1979) This theoryposits that fiscal policy has both short-term and long-term effects on economicgrowthandsocialproblems,similartoKeynesiantheory.Inpractice,i tisdifficultto distinguish between fiscal policy's short-term and long-term consequences, aswellaswhethereffectsaremorepermanent.Byadoptingthisframework,thegovernment can make informed and nuanced economic adjustments through the useof fiscal policy The "visible hand" of the State and the "invisible hand" of themarket are harmoniously combined in fiscal policy, which is based on Keynesianphilosophy but is more logically finished How much tax revenue the state shouldcollect to guarantee equity and maximize incentive, how much of that revenueshould be used to address market flaws and how much should be used to highlightthes e c t o r ' s s t r e n g t h s : t h e s e a r e a l l q u e s t i o n s t h a t n e e d a n s w e r s

A m o r e d y n a m i c and adaptable perspective of the budget's revenue and expense balance is revealed(DinhVanThong,2009).

THEORETICALOFPUBLICDEBTANDECONOMICGROWTH

Theoriesof Publicdebt

Taxes, duties, fees, revenue, property and business revenues, taxes, and finesare just a few examples of the public revenue sources that frequently support publicspending However, the state faces a public budget deficit due to causes such aslarge infrastructure investments, war, financial development, natural disasters, theeconomic crisis, the budget deficit, and ordinary public spending To overcome thissituation,publicsectorborrowingismentioned.

Public debt refers to the legal obligation of the state to return principal andinteresttotheholdersofpredeterminedrights according to acertains c h e d u l e Publiccreditandpublicdebt,alsoreferredtoasstatedebt,aredebtsowedbythe governmentorother public institutions Borrowing is possible in some cases,s u c h aslargeinfrastructureinvestmentsandwars,butitemphasizesthatborrowin gshould be limited and should not be continued After the Second World War, publicdebt increased significantly and changed structure due to the restoration of theeconomies and physical facilities of the countries affected by the war The other isthe financial needs of developing countries In the later stage, the borrowing processisnolongertransnationalbutbeginstotakeonanewdimensionwiththeestablishm entofinternationalorganizationssuchastheInternationalM o n e t a r y Fund(IMF)andth eWorldBank(WB)(Ulusoyetal.,2013).

AccordingtotheWorldBankReportof2015,theterm"publicdebt"encompassesth eentiretyofthegovernment'sexplicit,time-boundcontractualobligations that remain unfulfilled beyond a designated deadline The compositionof liabilities encompasses both domestic and international components, includingloans,cashholdings,andsecuritiestiedtocurrencies.

Intheprocessofglobalization,capitalmobilityisincreasing,a n d increasingly fiercefinancialcompetition has appeared in the global market.Inparticular,developingcountrieshavesoughttousepublicdebttofinancedevelo pment by attracting international short-term capital flows to their countriesthrough various incentive instruments (such as low taxes, low interest rates, etc.).However,boththesuddenfluctuationsincapitalflowsandtheincentivemechanisms deployed have dragged developing countries into a spiral of externaldebt. Borrowing can be spent irresponsibly because it is an easy income, therebycausing a downturn in the performance of the economy Capital is wasted, and thedebt burden is passed on to future generations due to inefficient public spending(Sugửzỹ,2010).

Classicaltheoriesofpublic debtand economicgrowth

The founder of classical economics, Ricardo (1817), stated that public debttends to cause countries to be unclear about their actual condition, which in turnleadstoirrationalpublicspending.Thisconceptholdsthatpaperwealthstimu lates consumerdemand,tightensinvestment,andslowscapitalandconsumergoodsexpansion.Cla ssicaleconomictheoristsclaimthatdebt-financedgovernmentalspending does not entirely offset the negative consequences of crowding out privateinvestment, resulting in a slowdown of the economy Thus, government borrowingfrom the domestic market induces a liquidity crisis and a spike in interest rates,whichdiscouragesprivateinvestment.

Ricardo contends that regardless of debt equity financing or tax hikes, theoverall 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 aresult of their purchase of government-issued bonds Ricardo explains further thatwhen the government lowers taxes and decides to finance its budget deficit throughthe issuance of bonds, households are often sensitive to increased consumptionbecause 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 debthinders economic growth, according to the classical school of thinking, because itdecreases both the fiscal discipline of the budgeting process and the private sector'saccess to credit (Broner et al., 2014) In addition, they argue that the repayment ofpublic debt, which is often foreign debt, hinders economic growth by discouragingprivateinvestmentandpotentialforeigninvestors.

Changes in government expenditure and the resulting increase in the publicdebt are mirrored by changes in private saving, therefore they have no impact onactual economic development As Ricardo (1817/1951) noted, the real economy isnot dependent on the government's option to increase revenue, such as throughtaxationo r d e b t i s s u a n c e , i n c e r t a i n c i r c u m s t a n c e s " T h e F i n a n c i n g S y s t e m " a n d "On the Principles of Political Economy and Taxation" were Ricardo's 1820 and1877 works on public debt's effects on resource allocation and economic growth,respectively.

In the 20th century, Barro (1974) and Buchanan (1976) popularizedRicardo's position in their articles titled "Are government bonds an e t a s s e t ? " a n d "Ispublicdebtcomparabletotaxes?"BarroandBuchanan'stheoreticalandempirica lcontributionsledtowhatisnowknownastheBarro-RicardoEquivalence

Hypothesis, or REH (Ricardian) According to the research of Barro (1989) andBuchanan (1976), public debt has no negative economic effects as long as solvencyis not an issue In other words, REH asserts that government debt explains financialmobilityexclusivelyamongeconomicplayers(Barro,1989).Buchanan(1976) believes that governmental debt has only a direct effect on private spending andsaving decisions, and has no effect on the likelihood of net economic growth. Thisimplies that changes in domestic and foreign public debt are independent of changesin major real macroeconomic variables, such as total investmenta n d p r o d u c t i o n , andhencedonoteffecteconomicgrowth(Barro,1989).Intheneoclassi calperspective, expansionary fiscal policies do not alter economic performance (Barro,1976; Pereira & Rodrigues, 2001) Thus, the Barro-Ricardo Equivalence Theorycontendsthatgovernmentdebtcannotbeemployedasaneconomicstimulant(Barr o,1989).

Six assumptions form the theoretical foundation of Ricardo's work The firstis aperfectcapitalmarket,acreditclimatethatpermitsmarketparticipantstoborrow freely. The second assumption is that the growth rate of the population, inthis case taxpayers, remains constant Third, both economic agents and consumptiondecisions are rational The fourth hypothesis is transfer between generations Thefifth assumption holdsthat the future tax burden ongovernmentdebt willp r o v i d e all services to those who benefited from the first tax cut The sixth hypothesisconcludes that there are no outstanding taxes (Barro, 1974, 1989; Buchanan, 1987).Therefore,accordingtotheargumentsofBarro(1974,1989),achangeingovernme nt funding strategy will be met by an equal adjustment in private saving tooffsetchangesinpublicsaving(Elmendorf& Mankiw,1999).

AccordingtotheKeynesianperspective,publicdebtgrowswhencircumstancesre quirethegovernmenttoincursubstantialdeficitspending.According to Keynesianism,excessive public debt is not a problem because theexpense of public debt is covered by the higher interest revenue that the publicobtains from holding public debt Keynes opposed any effort aimed at decreasing ormerelyhaltingthegrowthofdebt AccordingtoKeynes'theory,governmen tdebt encouragesjobgrowth,whichlowersunemploymentandboostsparticipation.Publicexp endituressupportedbydebthaveanadditiveeffect,resultinginamultipliereffectthat isbeneficialfornational outputorincome.

Keynesian theory maintains that government debt does not affect consumption as borrowed funds are reinvested to stimulate demand However, this overlooks taxpayers' increased tax burden, leading them to reduce employment and savings The government's response to raise taxes further exacerbates this issue, potentially preventing taxpayers from finding ways to avoid taxes This decline in after-tax income affects national income and savings, while increased interest income can push households into higher tax brackets Additionally, Keynesian theory underestimates the economic consequences of public debt issuance.

Excessivedebtreferstoascenarioinwhichthedebtisasymmetricallygreater than the revenues created by new investment projects to service existingdebts Therefore, profitability cannot decrease the amount of debt or improve thefirm'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 anincreaseinpredictedfuturetaxrates.Therefore,theover- indebtednesst h e o r y asserts that a country's debt will exceed its ability to pay It is anticipated that debtcosts will hinder foreign and domestic investments In fact, the predicted rate ofreturn on effective investment projects is insufficient to stimulate economic growth(Krugman, 1988) In addition, Claessens (1990) and

Clements et al (2003) arguethatoutstandingloansrepresentacircumstanceinwhichtheilliquidityim pact,the discouraging effect, or both are substantial enough to hinder economic growth.Additionally, due to the uncertainty of private investors, the accumulation of debthampers economic growth Because an increase in the money supply results in anincrease in government debt and a reduction in future tax revenues,governmentsmustaddressimmediateneeds.

Neoclassicaltheoriesofpublicdebt and economicgrowth

Since the 1960s, neoclassical economists have observed that higher taxes tocover interest payments on the nation's expanding domestic and international debthadadetrimentalimpactoncapitaldevelopment.Highandrisingpublicdebtnegatively impacts economic growth through a number of channels, including: (1)the dominance of private investment as government borrowing competes for capitalon the nation's capital markets; (2) higher long-term interest rates caused by thesupply of government debt and larger credit risk premiums; (3) the imposition ofmoredistortionarytaxestofinancefutureliabilitiesand increasedrepayment s;and

In the short term, debt can promote growth through investment spending, but in the long term, excessive public debt can trigger a negative cycle High debt levels necessitate higher risk premiums, driving up borrowing costs Conversely, countercyclical fiscal policy suggests that governments should implement expansionary policies during recessions to foster growth, while implementing restrictive measures to reduce debt levels in the intervening periods.

In the postwar era, the impacts of redistribution from one generation to thenext have been the subject of significant discussion The public debt is no longer aburden on taxpayers This burden is instead shifted in whole or in part to futuregenerations, who must pay taxes to settle the debt In a similar spirit,proponents ofRicardian neutrality argue that the existence of an active intergenerational debtburdeniscrucialtothepossibilityofdebtneutrality.Asaresult,adiscussionaros e

Public debt/GDP ratio Nonlinear threshold regardingt he m o d e l l i n g o f theeffectsof fiscalpolicy, particularly d e b t swa ps, as wellastheirimpacton socialutilityandinterestrates.

Keynesianeconomistshaveargued thatdebtlevels areof little consequence as long as interest rates on public debt remain below long-termgrowth rates This perspective on the relationship between debt growth and deficitdriversma yo ver lo ok c u r r e n t p r i m a r y d e f i c i t d r i v e r s a n d th e i n c r e as i n g i mp act of the rising debt ratio (public debt to GDP) on long-term interest rates Recent studiesimply that a significant increase in the debt-to-GDP ratio can result in significantlyhighertaxes,reducedfutureincomes,andadebtburdenforfuturegenerations.

In addition to these theoretical grounds, the presence of a nonlinear linkbetween the level of public debt and economic growth is supported by the thresholdtheoryorthenonlineareffect.Accordingtothishypothesis,anincreaseingovern ment debt levels has good benefits on economic growth when debt levels arelow,butnegativeconsequenceswhendebtlevelsaboveaparticularthreshold(Reinhart andRogoff,2010).

Figure 2.1 demonstrates that at low debt levels, an increase in the debt ratiostimulates the economy in accordance with the standard Keynesian multiplier. Theadditional debt level as a percentage of GDP will have a detrimental effect oneconomic growth once the debt ratio reaches a high level (nonlinear threshold).Existenceofanonlinearthresholdsuggeststhatneoclassicalviewsoftherelati onship between debt and growth may have some validity According to thesebeliefs, the impact of future tax rises on debt sustainability is anticipated to lowereconomic activity (Barro 1974) Alternately, a nonlinear threshold may imply thatrisinggovernmentborrowingmayboostcompetitionforfundsonthen a t i o n ' s cap italmarkets, resulting inhigherinterestrates.

Smithmaintainedthatgovernmentsshouldnotrundeficitsbecausetheaccumulati on of debt is "hazardous" for the nation, even if all the debt is held bydomestic investors In actuality, Smith rejects the mercantilist concept that payinginterest on public debt is analogous to "the right paying the left." This is due to thefact that thenecessityto buy backdebt earlywill resulti n t a x r i s e s , a d e c l i n e i n local capital, and currency devaluation, all of which have a detrimental effect for theremaining domestic producers (Smith, 1937) According to Smith, the public debtburden impedes a nation's

"natural development toward riches and prosperity" bydivertingprivatesectorresourcestopayinefficientgovernmentactivities.Consequent ly, Smith recommended a balanced budget in which all governmentexpenditures are funded by taxes Deficits in the budget are only acceptable in direcircumstances, such as war or natural disasters Smith contends that the way offinancingp u b l i c e x p e n d i t u r e s ( i e , t h r o u g h t a x a t i o n o r t h e i s s u a n c e o f b o n d s ) i s vitaltocapitalaccumulationinsuchsituations.However,taxesmostlylow erhousehold expenditures and produce modest savings As a result, the money thegovernment raises through borrowing or taxing will stifle private investment to thesameextent.Asaresult,taxationinhibitsfutureinvestmentandcapitalaccumulation,h ence diminishing theproductive potential alreadyin place.

Government spending financed by debt poses a significant threat to economic prosperity Debt directly impacts savings, reducing the funds available for productive investments Inefficient government expenditures, such as administrative costs, military support, and conflicts, diminish the economy's capacity to accumulate wealth When essential expenditures arise, taxes should be prioritized over debt issuance Taxes primarily utilize current income, affecting only private consumption and preserving the economy's growth potential.

Hansen (1968) emphasizes the use of debt financing when a budget deficit isincurred during times of war or natural disaster Hansen proved that higher lendingduringwartimesupportedeconomicexpansionandtheformationofcreditinstitut ions Hansen equated unemployment to a state of emergency; hence,thegovernmentmayusedebttoreduceoreliminateunemployment.

Modernmonetarypolicyontherelationshipbetweenpublicdebtandeconomicgr

At the current stage of macroeconomic study, it is widely held that largepublic debt exerts a major downward force on capital and wage rates, resulting inslower economic growth High governmental debt and deficit expenditure will notstimulateconsumptionorinvestment.

The idea underpinning why government borrowing might be detrimental toeconomic growth focuses mostly on budget deficits According to this idea, anincrease in the federal budget deficit results in an increase in the government'sdemand for capital from the private sector, as it seeks to borrow money from bothdomesticandoverseasinvestors.Thismeansthat,inahealthyeconomy,thegovernm ent will begin to compete with private borrowers for a fixed source ofsavings, resulting in an increase in interest rates This rate increase could discourageand impede private sector investments in machinery and equipment This drop ininvestment reduces the total quantity of operating capital available to the economy,which in turn reduces the rate of future growth On the other side, rising debt levelsmightcauseinvestors tobeconcernedthatacountry wouldnotbeable to payits creditors As a result, investors exiting the country's debt might cause an increase ininterest rates, as creditors must be assured of better returns to continue financing thenation'sd e f i c i t s A s u d d e n i n c r e a s e i n i n t e r e s t r a t e s w i l l " d i s t u r b " t h e f i n a n c i a l sector and impact growth through this channel at that moment During the period ofthedebt,financialcrisesinducedbyexcessivedebthaveimposedsubstantialeconomicc onsequenceson anumberof nations(Reinhartand Rogoff,2010).

Numerousstudiesdemonstratethatvariousvariablescanaffectthetransmission mechanism between high levels of governmental debt and economicactivity. Kumar & Woo (2010) find that the negative impact of high persistent debtlevelsinthepublicsectoroneconomicgrowthismostlyattributabletothedeceleration oflaborproductivitygrowth,asaresultofadeclineininvestmentanda decline in stock capital accumulation (Cecchetti et al., 2011) show that in thefuture, rising debt levels may hinder the availability of credit flows, hence having anegative impact on growth via transmission channels High amounts of public debtcan increase the risk premium, resulting in higher financing costs, which mightthreaten the sustainability of public finances (Kirchner et al., 2010) According toPerotti (1999), early fiscal conditions characterized by deficits and public debt arecrucial drivers of the deployment of fiscal reforms Cecchetti et al (2010) believethatasinvestorslosefaithinthegovernment'sabilitytorepaydebt,theriskpremium for issuing government bonds rises, which can lead to an unstable debtsituationandarecession.Therearefourprimaryavenuesviawhichaltera tionsinthe public debt affect economic growth These consist of (a) private saving, (b)public spending and investment, (c) overall productivity, and (d) sovereign long- termrealandnominalinterestrates(Buffieetal.,2012).

The relationship between public debt and economic growth is divided bytheories into four groups: no effect, negative effect, positive effect, and nonlineareffect.

Theoriesofthelinearimpactofpublicdebtoneconomicgrowth

This theory assumes that the impact of public debt on real macroeconomicindicatorsisnegative.Thedebtbalancehypothesisexplainsfundamental lythenegative impact of government debt on economic growth Myers (1977) suggestedthat the accumulation of public debt during a fiscal slump affects the private sector'sability to make optimal future investment decisions (Reinhart et al , 2012).

Severaltraditionalgrowthmodels,primarilyinneoclassicalandendogenouscontexts,supp ortthisnotion,statingthatpublicborrowinglowersfiscaldisciplineandincreasesfutureta xburdens(Buchanan,1958;Diamond,1965;Meade,1958;Modigliani,1961).According toDiamond's(1965)reasoning,theamountandvariations in taxes resulting from domestic and foreign government debt have adetrimentalimpactonthedevelopmentoftotalequity.

Public debt negatively affects economic growth through rational expectations, the crowding-out effect, and financial repression Rational expectations posit that high public debt creates uncertainty about future policy outcomes, leading to higher tax revenues or inflation, discouraging investment The crowding-out effect occurs when public spending displaces private spending by lowering the economy's ability to lend, resulting in higher real interest rates that discourage private investment Financial repression theory contends that public debt financed by tax distortions or debt issuance worsens policy inefficiencies and influences private economic entities' decision-making, leading to disinvestment The investment, savings, and liquidity markets also determine the impact of public debt on economic growth.

Public debt plays a crucial role in economic growth Wagner's "Law of growing state activity" suggests that public sector expansion correlates with economic development, while the Keynesian fiscal multiplier effect highlights the positive impact of government spending on economic output In developing countries, government activities expand to meet societal needs, further driving economic and social progress.

(Bird,1971).AccordingtoWagner(1911),theprogressofindustrializationandurbanization necessitates the creation of infrastructure that is both complex andcostly In other words, as society develops towards modernity and urbanization, thegovernmentp r o v i d e s m o r e a n d m o r e c o m m o d i t i e s a n d s e r v i c e s L y b e c k ( 1 9 8 8 ) adds that education, health, and other social services and goods form a demandfunctionthatisincome-elastic,andthatincreasinglysophisticatedmilitarytechnology will absorb a greater proportion of national wealth According to thesetheoreticalframeworks,governmentsecurities(publicdebt)functionasl i q u i d ass ets,andtheirincreaseaffectseconomicgrowthandliquidityprovision(Kobayashi,2015).

On the other hand, Keynes's view of the positive relationship between publicdebt and economic growth has two sides: (a) rising public debt causes high levels ofefficient public spending, which then act as automatic stabilizers in the economy;and( b ) d e f i c i t - f u n d e d g o v e r n m e n t s p e n d i n g h a s a g r e a t e r p o s i t i v e e f f e c t o n t h e multiplierthantax-fundedgovernmentspending(Holtfrerich,2013).Keynes'sreasoning indicates that an increase in public sector spending (public debt) mightpromoted o m e s t i c e c o n o m i c a c t i v i t y a n d e n t i c e p r i v a t e i n v e s t m e n t , h e n c e r a i s i n g thenetrateofreturn(Elmendorf&Mankiw,1999).

InadditiontoKeynes'sview,thereisanothertheorythatexplainst h e positiver e l a t i o n s h i p b e t w e e n p u b l i c d e b t a n d e c o n o m i c g r o w t h T h i s t h e o r y i s based on the premise that government borrowing from financial funds and interstatecapital is required to fill the gap between domestic investment and saving (Pattilo etal., 2002) Elmendorf and Mankiw (1999) suggest that short-term foreign debt willstimulateaggregatedemandandpromoteanincreaseinnationaloutputbyintroducingf reshfinancialresourcesintotheeconomy.

Delong and Summers (2012) also claim that the effect of public debt oneconomic growth is beneficial: In an economy where output is below potential, highexternal debt will have a positive influence on the fiscal multiplier In other words,fiscalexpansionisself- financingandpromotesaggregatedemandinaweakeconomywheninterestratesrise,resu ltingineconomicgrowth,accordingtoGreiner(2006).

Inadditiontothefavorablebenefitsofinternationalpublicdebtontheeconomy, domestic public debt also has positive consequences on the economy.Specifically, Gulde et al (2006) contend that government borrowing from the localdebt market serves to strengthen the domestic currency and financial markets, aswell as encouraging private saving and, consequently, overall investment (Abbas

&Christensen,2007).AccordingtoAbbasandChristensen(2007),monetaryauthorities would havelittlecontrol overloanceilings,interestrates,andhighreserve requirements in economieswithwell-developeddomesticdebtmarkets.Financial regulations skew lending decisions in the banking sector, resulting infinancialintermediationatthepriceofsavingsandinvestmentintheprivatesector.

Moss et al (2006) and Christensen (2004) describe the positive effect ofdomesticp u b l i c d e b t o n e c o n o m i c g r o w t h ; g o v e r n m e n t a v a i l a b i l i t y a n d a c c e s s t o domestic funding can also help to counterbalance the effects of external shocks onthe economy, which weaken domestic financial institutions Moreover,Christensen(2004)addsthattheavailabilityandaccessibilityofdomesticpublicdebtinstr uments can offer savers an attractive alternative to capital flight, as well as luredepositsfromthenon-monetarysectorintotheformalsector.

Theoriesofnonlineareffectsofpublicdebtoneconomicgrowth

Inadditiontotheideasoutlinedabove,anotherhypothesisverifiesthenonlinear connection between public debt and economicd e v e l o p m e n t T h e i m p a c t of public debt to economic growth is positive at lower levels and negative at largerlevels, 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)andKrugman(1988)primarilyexplicatethisg r o w t h - o p t i m i z i n g public debt threshold theory According to Krugman (1988), when the public debt isbelow a particular level, the government concentration impact will outweigh theinvestment effect; therefore, raising the public debt stimulates economic growth.Krugman (1988) states that economic growth can only occur when an increase inefficientpublicspendingsubstitutesadeclineinprivatespending.However,Krugman( 1988)believesthatpublicdebtwillhaveanegativeinfluenceoneconomic growth above a certain level since the plus attraction effect is greater thanthe private attraction effect The author contends that the crowding out effect ariseswhen government loans to cover fiscal deficits lower the quantity of capital that canbeprovidedtothe privatesector,hencedecreasingoverallnationalinvestment.

In a similar vein, Sachs (1989) argues that lower levels of public debt boosteconomic growth, but above a certain threshold, high levels of government debtincreaseeconomicinstabilityviafuturetaxhikes.Theauthorcontendst h a t extende d economic uncertainty causes slower investment and consumption, fewerjobs, 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 toeconomic growth focuses mostly on deficits According to this idea, a growth in thebudget deficit causes the government to raise its demand for "loanable" capital fromtheprivatesector;ittriestoborrowmoneyfrombothdomesticandforeigninvestors. This indicates that, in a healthy economy, the government will begin tocompete with private borrowers for a fixed supply of savings, hence increasinginterest rates. This rate increase could lessen the "crowding out" of private sectorexpenditures in equipment and plant This fall in investment reduces the amount ofcapitala v a i l a b l e t o o p e r a t e t h e e c o n o m y , a n d t h i s d e c r e a s e i n c a p i t a l r e d u c e s t h e rateoffuturegrowth(GaleandOrszag,2004).

Orszag etal (2004)and BallandMankiw(1995) implyt h a t r i s i n g d e b t levels can cause investors to be concerned that a nation will be unable to pay itscreditors As a result, investors exiting the country's debt might cause an increase ininterest rates, as creditors must be assured of better returns to continue financing thenation's deficits A rapid increase in interest rates at that time will cause disruptionsinthefinancialsystemandimpactgrowththroughthischannel.

RELEVANT EMPIRICAL STUDIES ON THE RELATIONSHIP BETWEENFISCALPOLICYANDTHEBUSINESSCYCLE

Gavin and Perotti (1997) concluded that fiscal policy in 13 Latin Americancountries from 1968 to 1995 was pro-cyclical The authors stated that the fiscalpolicyo f d e v e l o p i n g n a t i o n s i s t h e p o l a r o p p o s i t e o f t h a t o f d e v e l o p e d c o u n t r i e s The cyclical metric increases the government's budget surplus by 0.25 percent forevery one percent of GDP growth during periods of economic expansion During arecession, both the deficit and the gross domestic product decrease by 1 percent Asa 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 "greedyeffect," which causes political distortions when political interest groups make morespendingdecisionswhiletheeconomyisbooming.IlzetzkiandVegh(2008) studied the cyclical effects of fiscal policy on the business cycle, as well as thereverse causality between them by using a variety of econometric models For thesampleofdevelopingcountriesselectedbythetworesearchers,theG M M regression determines that fiscal policy has a pro-cyclical character Similarly, Lane(1998)hasshownthat Irishfiscalpolicyispro-cyclical.

Talvi and Végh (2005) conclude that the procyclicality of fiscal policy isprevalenti n a l l 3 6 d e v e l o p i n g c o u n t r i e s i n t h e i r s a m p l e , a n d n o t j u s t i n L a t i n America The study demonstrates a positive association between the composition ofgovernment expenditures and GDP for a sample of 36 emerging nations (with amean coefficient of 0.53) Thornton (2008) discovered in an analysis of 37 Africannations between 1960 and 2004 that the real government consumption in 32 of thesenations is procyclical to output changes Manasse (2006), who generates cyclicalestimates by means of nonlinear techniques, issues a warning Find the observeddisparitiesintheeconomiccyclicalityoffiscalpolicybetweendeveloping anddeveloped nations, which are in part attributable to the greater severity of economicshocksindevelopingnations.

Kaminsky and Végh (2004) analyzed the cyclicality of capital flows, fiscalpolicy, and monetary policy in 104 countries from 1960 to 2003 and reached thefollowingconclusions:(1)CapitalflowsareaprocyclicalinputinOECDandemerging nations; (2) Fiscal and monetary policy are procyclical for the majority ofdeveloping nations, with the effect being most prominent in upper middle-incomenations For OECD countries, monetary policy is countercyclical; (3) In developingcountries,thecapitalflowcycleandthemacroeconomiccyclearemutuallyrei nforcing,withthecapitalinflowperiodassociatedwithexpansionarymacroeconomic policy and the capital outflow period associated with contractionarypolicy.

Fiscal policy has been a prevalent subject for empirical analysis, particularly in developing countries where its cyclical nature has been widely acknowledged A study by Stein et al (1999) found a substantial correlation between public consumption and economic growth, with a coefficient of 0.52 across 26 Latin American nations from 1970 to 1999.

5 T a l v i a n d CarlosVegh(2005)foundthatpublicconsumptioniscyclicalacross36 developing nations from Asia, Africa, the Middle East, and Latin America, with a correlationcoefficientof0.53.Kaminskyetal.(2004)investigated thefiscalpolicyofdevelopingnations.Asmallsampleof83low-andmiddle- incomecountriesdemonstrates that fiscal policy is procyclical This also yields comparable outcomestoAkitobyetal(2004).

Thefiscalpolicytrendindevelopingnationsandnumerousemergingeconomies is pro-cyclical Studies have shown potential causes of procyclicality,including institutional weakness, social friction, and a loss in creditworthiness oninternational credit markets (Alesina and Tabellini, 2008) Research shows thatcorruption and democracy are the most important factors that affect cyclicality indeveloping countries The coefficients for the role of net external debt and socialinequalityasmeasuredbytheGINIindextendtooscillatearoundthe10%significan ce threshold Thus, institutional difficulties are the primary reason forcyclicalfiscal policy(Halland andBleaney, 2011).

The relationship between the economic cycle and fiscal policy has been thesubjectofnumerousotherhypotheses,particularlythosethatfocusonthedistinctions between developed and developing nations Essential explanations havebeenproposed:i)constraintsonaccesstolocalandforeigncreditm a r k e t s (Caballe roandKhrisnamurthy,2004;GavinandPerotti,1997;CalderónandSchmidt-Hebbel,

2008) ii) political structures or organizations (Lane, 2003; Talviand Végh, 2005; Alesina et al., 2008); And iii) wealth disparity polarization (Woo,2009).

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 1960 and

According to a 2003 study, higher levels of corruption in democracies lead to more pro-cyclical fiscal policy This pro-cyclical tendency stems from voters' concerns that politicians may misuse public resources for personal gains When the economy experiences a surge, corrupt governments are more likely to face demands for increased public spending and tax cuts, as voters fear misallocation of funds This results in a fiscal policy that amplifies economic fluctuations, contributing to a pro-cyclical stance.

Furthermore,thestudydemonstratesthatprocyclicalfiscalpolicyism o r e prominent in economies with high levels of corruption In a circumstance in whichvoters perceive the state of the economy but are unable to verify the amount ofgovernment income collected by the state bureaucracy.The majority of budgetsurpluses are expected to be spent on plundered funds by voters rather than goingtoward the nation's savings In order to "grab as much of the pie" as possible, votersurge for increased expenditure (tax cuts, higher government spending, or transfers)infavorabletimes.Thispublicpressurecompelsthegovernmenttospendinacco rdance with the business cycle and to even borrow more money The empiricalfindings support the premise that countries with a greater prevalence of corruptionhave fiscal policies that are more pro-cyclical In addition, they uncover evidencethat pro-cyclical fiscalpolicy ismost prevalent in democracies and corruption,whereh i g h l e v e l s o f c o r r u p t i o n a r e a s s o c i a t e d w i t h h i g h l e v e l s o f v o t e r accountability They discover that the confluence of democracy and corruption ismore likely to result in pro-cyclical fiscal policy; they ascribe this to democraticpressureongovernmentexpendituretopreventthemfrombeingusurpedbyco rruption.

Some theories of the procyclical character of fiscal policy in developingcountries contend that developing countries confront credit limits that prevent themfrom borrowing during economic downturns, and that they were forced to servicetheir obligations during that time, prompting a contractionary fiscal policy wheneconomic growth weakened The credit constraint theory states that developingcountries are less likely to smooth the business cycle due to their inability to borrowfrom international credit markets during economic downturns Gavin and Perottiinitiallysuggestedthisexplanation(1997).Accordingtotheirresearch,fiscalcyclical ity in Latin America is particularly severe during economic downturns Inaddition, they find that the IMF's fund accessibility to emergency finance is greaterduring these periods and that the initial fiscal deficit defines the procyclicality offiscal policy They interpret the data as evidence that investors limit financing tonationswheretheyfearthathighfiscaldeficitscouldbecomeunmanageable.Aghione t a l

( 2 0 1 4 ) e x a m i n e t h e e x t e n t t o w h i c h e n t e r p r i s e s h a v e r e c o u r s e t o external loans to finance company expenses This impacts the economy's ability torecover from a recession by fostering their long-term growth through enhancedproductivity and project development Suzuki (2015) demonstrates that pro-cyclicalfiscal policy arises due to inefficiencies in the credit market. Nonetheless, politicaleconomyissuesmightalsoexplainthereasoningbehindcyclicalfiscalpolicy.Acc ordingtoKaminskyetal.

(2004),developingcountriestendtoexecutea cyclicalfiscalstrategy,whereasindustriali zedcountriesfollowananticyclicalmodel They contend that the inadequacy of international creditmarkets is theprimary cause of cyclical fiscal policy During economic downturns, capital supplyis hindered by flaws in the international credit market Therefore, countries cannotstimulatetheireconomiesduringrecessions,andcyclicalfiscalpolicyisthegovern ment's only option These findings are in accordance with the conclusion thatwhenacountrylosesaccesstoglobalfinancialmarkets,capitalinflowsintodeveloping economies "suddenly stop" and are accompanied by dramatic decreasesinrealprices,failedinvestments,andfiscalausteritymeasures.

When comparing acountry's financialopenness to the ratioo f e x t e r n a l d e b t to GDP, Calderón and Schmidt-Hebbel (2008) discover that greater access to bothdomesticandinternationalcapitalmarketsenabletheimplementationoffiscalpolicies that reverse the economic cycle Cyclical fiscal policy can restrain long- termeconomicgrowth,particularlyinnationswithlowlevelsoffinancialintermediation (Aghion and Marinescu, 2008), and it also represents vulnerability(Stoian et al.,

2018) Riascos and Végh (2003) and Caballero andKhrisnamurthy(2004)contendt ha ti nad eq uate f i n a nc i a l de pt h, asm easu re d bydomestic loans to the private sector and homogeneity in financial asset class, impedes the execution offiscal policy against the business cycle Due to a lack of fiscal depth or capitalsupply from both the private and governmental sectors, cyclical fiscal policy isprominent in developing nations.Thus, there will not be sufficient capital injectionsto support the economy during a recession As a result of tardy fiscal adjustments,governments inhibited investment during the boom The business cycle is not onlyaffectedbycredit marketdefectsatthenationallevel.

Fiscal policy, as measured by public expenditures, exhibits cyclicality that varies with political polarization and government debt constraints This cyclicality extends beyond aggregate consumption, as political tensions in power distribution can lead to more cyclical sub-central government expenditures and intergovernmental transfers Stoian et al (2018) developed a framework to assess fiscal risk in 28 EU countries, identifying the Czech Republic, Greece, France, Italy, Malta, Portugal, and the United Kingdom as exhibiting high financial vulnerability coefficients.

LITERATURE REVIEW BETWEEN PUBLIC DEBT AND ECONOMICGROWTH

Numerous empirical studies have been conducted on the effect of public debton economic growth, with varying results Despite the fact that some research haveindicated that public debt slows economic growth, other studies have concluded thatpublicdebtactuallyhelpstopromoteit.

Several research, including Reinhart and Rogoff (2010, 2012), Mohd et al., (2013);Choongetal.,

(2010);AbuandHassan,haveproventhea s s o c i a t i o n between government debt and economic growth (2008) External debt negativelyimpacts economic growth, accordingto Reinhart andRogoff (2010, 2012),C h o n g etal.(2010),andMohdetal. (2013).Empiricalresearchonther e l a t i o n s h i p between government debt and economic growth, such as Diamond (1965), foundthatgovernmentdebtrestrictsindividuals'accesstotheirsavingsandcapitalreserve s.AdamandBevan (2005),Saint-Paul (1992),and Aizenmanetal.(2007) establish a negative correlation between government debt and economic growth.These studies include Gómez-Puig and Sosvilla-Rivero (2015; 2017), Ahlborn andSchweickert (2016), Panizza and Presbitero (2013), Szabo (2013), Égert

(2012),AfonsoandJalles(2011),Cochrane(2011a,2011b),KumarandWoo(2010),Inter nationalMonetaryFund(2005),Clementset al (2003).

Between 1961 and 2013, Gómez-Puig and Sosvilla-Rivero (2017) evaluatedthe long-term relationships between public debt and GDP growth rates in both EUcountries; Using an autoregressive distributional delay (ARDL) model, an empiricaltechnique on annual data, the authors conclude that public debt has a negativeimpactonthelong- termGDPgrowthratesofeuroareamemberstates.

WhileexaminingtherelationshipbetweenpublicdebtandGDPg r o w t h using a sample of 111 OECD and developing countries over eight five-year periodsfrom 1970 to 2010, Ahlborn and

Schweickert (2016) came to the conclusion that thelinkb e t w e e n p u b l i c d e b t a n d G D P g r o w t h v a r i e s s i g n i f i c a n t l y b e t w e e n c o u n t r i e s due to the fiscal efficiency of each economic system Using a range of statisticaltechniques, including time-fixed effects, ordinary least squares (OLS), and two- stagecombinedleastsquaresrandomeffects,AhlbornandSchweickert( 2 0 1 6 ) foundtha tpublicdebthasasignificantnegativeimpactonGDP growthrates.

According to Yeasmin and Chowdhury (2014), in Bangladesh, debt has amajor negative impact on economic growth The external debt servicing load inBangladesh retards GDP growth by 1.3% If considerable reductions in foreign debtare anticipated, Clements et al (2003) show that the growth of per capita income inhighly indebted poor countries (HIPCs) will increase by around 1 percentage pointper year Babu et al (2014) found that external debt has a considerable negativeinfluenceonGDPpercapitagrowthintheEastAfricanCommunity(EAC).Maliket al (2010) predict that economic growth will decline as external debt increases.Using the instrumental variable technique, Panizza and Presbitero (2013) examinedthe effect of public debt, as a ratio of public debt to GDP, on real GDP per capitagrowthi n a s a m p l e o f O E C D n a t i o n s I n a l l a n a l y z e d e c o n o m i e s , P a n i z z a a n d

GDPratioandreal per capita GDP growth.

Szabo(2013) als oexa mi ne dt he im pac to f the r at io of pu bl ic de bt t o G

Public debt has a significant impact on GDP growth rates in the short term, with a 1% increase in the debt-to-GDP ratio leading to a 0.027% decline in annual GDP growth However, in the long term, its influence diminishes, suggesting a minimal impact on overall economic growth.

0 % , a n d 9 0 % thresholds Afonso and Jalles (2011) evaluated the impact of government debt onGDP per capita growth and productivity in 155 developing and developed countriesfrom 1970 to 2008; utilizing both synthetic time series and OLS cross time series;they discovered a statistically significant negative relationship between governmentdebtandGDPpercapitagrowthinalleconomiesstudied.

Reinhart and Rogoff's study between 1970 and 2009 found that government debt below 90% of GDP has a minimal impact on economic growth However, rising government spending worsens the issue of government debt, which supports long-term economic growth but can lead to budget deficits These deficits can be financed through domestic or international loans, but the financial situation remains vulnerable to economic fluctuations and debt levels.

Due to the massive balance of payments impact of the mid-1970s oil crisis,indebted countries are battling with their enormous debt; this has a negative effecton economic development, as emerging economies attempt to maintain growth andstrivetocompletedevelopmentprojects(Stambuli,1998).Asthegovernmentborrow s short-term and invests extensively in long-term initiatives, it is difficult forthem to collect the revenues necessary tomeet 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 oneconomic growth is statistically significant at the 5% confidence level only forArmenia,Azerbaijan,Belarus,Kazakhstan,andMoldova.

High external debt hinders economic growth by restricting investment in both quantity and efficiency Excessive debt limits government's ability to implement fiscal adjustments and trade liberalization, creating a less favorable macroeconomic environment Investors become risk-averse, favoring short-term capital projects with higher returns, potentially compromising long-term investments (Pattilo et al., 2002) As a result, the economy faces reduced growth due to diminished investment returns and a less investment-conducive environment.

Kharusi and Ada (2018) discovered astatisticallysignificantnegativerelationshipbetweenOman'sexternaldebtandeconomicdevelo pmentfrom 1990to 2015.

Siddique et al (2016) use an automatic distribution delay (ARDL) model;withcontrolvariablesfortrade,populationandcapitalformation- toobservewhetherdebtasaratioofpublicdebttoGDPaffectsgrowthin40i n d e b t e d countri es from 1970 to 2007; The authors find that the debt variable has a negativeands t a t i s t i c a l l y s i g n i f i c a n t e f f e c t o n G D P i n b o t h t h e s h o r t a n d l o n g r u n , i n l i n e withpriorexpectations.Theyalsoemphasizethatincreasinglev elsofdebthavea detrimental effect on economic growth in indebted nations, as a significant portionoftheiroutputisspenttorepayforeignlendinginstitutions;thisdiscouragesinvest ment.

Snieka and Burksaitiene (2018) evaluate the impact of changes in real publicdebt, real private debt, and deflationary housing prices on GDP in 24 EuropeanUnion (EU) nations using least squares regression (OLS) and autoregression

(AR)withp a n e l d a t a T h e m i n o r e u r o a r e a c o u n t r i e s w e r e r e m o v e d f r o m t h e a n a l y s i s sincethevolatility offinancialservicesaffectedthefluctuationsoftheirsmalleconomies In the 24 examined European Union nations, the negative impact ofpublic debt growth on the economy is significant when measured with a lag of zero,one,ortwoyears.

Lim (2019) examines the relationship between debt and growth when totalprivate and state debt is considered The sample consists of 41 nations from 1952 to2016.Theresearchmakesuseofavectorautoregression(VAR)model.Limdiscovered a negative correlation between the rate of overall debt increase and therateofeconomic growth.

Abubakar and Suleiman (2020) build an analytical model that evaluates theimpact of public debt on economicg r o w t h i n 3 7 O E C D n a t i o n s u s i n g t w o - s t a g e least squares regression In contrast to previous research, the authors of this studyanalyzeboththelong-termandshort- termeffectsofpublicdebtoneconomicgrowth The findingsindicate thatpublic debt has a substantialpermanent andtemporarypositiveeffectoneconomicgrowth.Theextentofthen e g a t i v e perman enteffectofdebtexceedsthefavorabletemporarybenefit Inaddition,notall nationgroupsreceivetransitorygoodimpacts,whileallcountrygroupsexperiencepersist entnegativeconsequences.

Asteriou, Pilbeam, and Pratiwi (2020) investigate the short- and long- termrelationshipsbetweenpublicdebtandeconomicgrowthin14Asiann a t i o n s betw een 1980 and 2012 The authors employ an ARDL model and a group mean(MG)estimatortoensureconsistencybetweenshort-runandlong- runrelationships.

THEBASISOFDESIGNINGEMPIRICALRESEARCHMODEL

Previous researches have demonstrated that many emerging nations tend toembracepro- cyclicalfiscalpolicies.Duringeconomicdownturns,governmentsreduceexpenditurean draisetaxes,whileduringeconomicexpansions,t h e y increase spending and reduce taxes The cyclical nature of fiscal policy is deemedunsatisfactory for both developed and developing countries During a recession,private consumption and investment diminish as a result of decreased demand, andtheywillworsenifgovernmentsundertakecontractionarypolicies.Similarly,cyclica l fiscal policy causes the economy to overheat during periods of economicexpansion The economy becomes overly optimistic as a result of tax cuts, moregovernmentspending,andhigheraggregatedemandfromtheprivatesector.There isalotofevidencethatemergingcountriesuse cyclicalfiscalpolicy,eventhou ghitsimplementationisnotdesirable.

Previousstudieshaveattemptedtoexplainwhyeconomies,particularlydevelopin geconomies,electtopursuecyclicalfiscalpolicies.Therearet w o primaryexplanationsf orthis:first,cyclicalfiscalpolicyresultingfrominefficiencies and credit limits on international credit markets (Gavin and Perotti,1997; Kaminsky et al et al., 2004; Caballero and Krishnamurthy, 2004; Calderón etal., 2010; Aghion et al., 2014) The immaturity of these developing nations' creditmarkets makes their fiscal policy cyclical Emerging countries will utilize a limitedvariety of credit instruments in the event of negative economic shocks, based ontheir ratings, as shown in Latin American countries during times of crisis Periods ofIMF loan utilization are significantly more frequent than typical periods (Gavin andPerotti, 1997). Alberola et al (2006) also confirmed the cyclical nature of LatinAmerica's fiscal policy, arguing that the region's financial vulnerability is not onlyattributable to outstanding public debt levels, but also to fluctuations in financialconditionsa n d t h e i r e f f e c t o n t h e f i n a n c i a l p e r f o r m a n c e o f f i n a n c i a l i n s t i t u t i o n s The second approach holds that political variables, such as the distortion of politicalregimes, the quality of political institutions, or political polarization, are the rootproblem of cyclical fiscal policy (Calderón and Hebbel 2008) Studies focus onidentifying factors that may contribute to the procyclicality of public spending,examiningtheoriesrelatedtosocialinequality(Woo,2009),keys t r u c t u r e s countries (Alesina et al., 2008) and imperfect credit markets (Gavin and Perotti,1997) The results show that political factors and social inequality are associatedwith cyclical government expenditures for the entire group of countries analyzed intheEU,inbothcross-countryregressionandtabledata.

Prior studies have concentrated primarily on government spending as a proxyfor fiscal policy The proxies of government revenue have not been taken into goodconsiderationduetothedearthofinformationonrevenueandtaxratesfordeveloping nations Numerous studies and theories have been conducted on thecyclicalityoffiscalpolicyinemergingnations.AccordingtoTalviandV é g h (2005),reg ressionisthemosteffectivetoolformeasuringthefiscalpolicyreaction to the business cycle In order to construct regressions, the dependent variable mustbe identified as an outcome of fiscal policy, government spending, or the fiscalbalance, which are the most frequently employed variables The evolution of theGDPinseveralforms(logarithmicorgrowthrate)isalsooftenemployedt o measurebu sinesscyclechanges.

Although it would be good to monitor thee v o l u t i o n o f t a x c o l l e c t i o n s i n order to more accurately evaluate the cyclical aspects of countries' fiscal strategies.However, tax-related variables in the sample are frequently inconsistent over thelong term Moreover, depending on the country sample analyzed, tax revenues mayalso be affected by other significant factors, such as tax evasion and the shadoweconomy,theimpactofelections,governmentregulationoftaxcollection,orcons umption Even though some aspectsmay be defined,t h e i n f o r m a t i o n d a t a o f thecountriesunderexaminationareofdubiousreliability.

This study is founded on the budget deficit-related theory that explains whypublic debt can be detrimental to economic growth According to this hypothesis, anincrease in the budget deficit results in an increase in the government's demand forcapital from the private sector, as it seeks to borrow money from both domestic andinternational investors This means that, in a healthy economy, the government willbegin to compete with private borrowers for a fixed source of savings, resulting inan increase in interest rates This rate increase could discourage and impede privatesector investments in machinery and equipment This decline in investment reducesthet o t a l q u a n t i t y o f o p e r a t i n g c a p i t a l a v a i l a b l e t o t h e e c o n o m y , w h i c h i n t u r n reduces the rate of future growth On the other hand, rising debt levels might causeinvestors 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 ratessince bigger returns must be provided to creditors for them to continue financing thenation'sd e f i c i t s A s u d d e n i n c r e a s e i n i n t e r e s t r a t e s w i l l " d i s t u r b " t h e f i n a n c i a l sector and impact growth through this channel at that moment Financial crisesinduced by excessive debt have resulted in substantial economic costs for a numberofnationsovertime(ReinhartandRogoff,2010).

In contrast, the growth-optimizing public debt threshold theory articulated bySachs (1989) and Krugman (1988) is predicated primarily on the debt balancinghypothesis.AccordingtoKrugman(1988),whenthepublicdebtisbelowaparticula r level, the government concentration impact will outweigh the investmenteffect; therefore, raising the public debt stimulates economicgrowth Krugman(1988) states that economic growth can only occur when an increase in efficientpublicspendingsubstitutesadeclineinprivatespending.However,K r u g m a n (1988) believes that public debt will have a negative influence on economic growthabove a certain level since the plus attraction effect is greater than the privateattraction effect Theauthor contends that the crowding out effect arises whengovernment loans to cover fiscal deficits lower the quantity of capital that can beprovided to the private sector, hence decreasing overall national investment In asimilar vein, Sachs (1989) argues that lower levels of public debt boost economicgrowth, but above a certain threshold, high levels of government debt increaseeconomicinstabilityviafuturetaxhikes.Theauthorcontendsthatextendedecon omic uncertainty slows investment and consumption, reduces employment, andslowsthepaceofoutputgrowthduetothecrowdingeffect.

Studiesontheimpactsofexcessivepublicdebthavenotyetyieldedaconsistent outcome,and additional research is required on this topic, particularlywith the calculation of the diverse effects of high and persistent public debt oneconomic growth across countries Existing empirical research indicates a nonlinearand concave functional link between public sector debt and economic expansion(Panizza & Presbitero, 2014) This suggests that public debt and growth have aninverted U-shaped connection, so that when a particular threshold level of publicdebt is exceeded, the positive effect becomes negative However, it should be notedthat the projected threshold values do not provide a growth projection target level Itis acceptable to believe that the study provides concrete evidence of the nonlinearrelationshipbetweenpublicdebtandeconomicdevelopmentinthisscenario.Instab ility in debt dynamics may raise the probability of detrimental effects oncapital accumulation and productivity growth, which may have a negative influenceoneconomicgrowth.Consequently,thestudycancontributetoabetter understandingoftheproblemofexcessivepublicdebtanditsimpactoneconomic activity.

Existing empirical studies have explored the relationship between government debt and economic growth However, empirical findings regarding the asymmetric impact, known as the public debt threshold, remain inconclusive The majority of research suggests that public debt below a certain threshold positively influences economic growth, as supported by studies like Reinhart and Rogoff (2010), Baum et al (2013), Woo and Kumar (2015), Taylor et al (2012), and Irons and Bivens (2010).

P e s c a t o r i e t a l , 2014;R a n k i n a n d R o f f i a , 2 0 0 3 ; M e n c i n g e r e t a l , 2 0 1 5 ; B e x h e t i e t a l , 2 0 2 0 ) Surprisingly few studies have investigated how public debt and the nonlinear impactofp u b l i c d e b t a f f e c t e c o n o m i c g r o w t h i n d e v e l o p i n g n a t i o n s ( M e n c i n g e r e t a l , 2015; Checherita and Rother, 2010; Bexheti et al., 2020) Emerging nations haveencountered a variety of issues, including war, political instability, hyperinflation,massive public debt, and financial catastrophe In transition, these nations provide afascinating case study, particularly on the relationship between public debt andeconomic growth Therefore, the purpose of this research question is to investigatethe effect of Vietnam's public debt on economic growth To analyze the relationshipbetween public debt and economic development, we suggest the four hypotheseslistedbelow:

H1: Fiscal policy has a causal impact on the economic cycle in Vietnam.H2:Vietnam's fiscalpolicyrespondspositivelytotheeconomiccycle.

H3: The public debt hypothesis does not have a linear influence on economicgrowth,butpublicdebt hasa asymmetric effectoneconomicgrowthinVietnam.

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

To examine the asymmetric relationship between Vietnam's public debt andeconomicg r o w t h , w e e m p l o y N A R D L e c o n o m e t r i c m o d e l s a n d m e t h o d o l o g i e s

Several research examining the nonlinear effect of public debt and its effect oneconomic growth in transition countries provide the basis of this study's primarypremise(Mencingeret al.,2015; ChecheritaandRother, 2010;Bexhetietal.,2020).

RESEARCHMODEL

Adowngraderegressionisamultivariableregressioninwhicht h e coefficient matrices are subject to constrained conditions Johansen estimated themodels∆Ytand Yt-1d e p e n d i n g o n t h e∆Yt-1,∆Yt-

. 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 TheresidualsR0a n dR1o ftheequation(4.1.3.12)and(4.1.3.13):R0=∆𝑌

TheVAR modelthatis derived(4.1.3.6)is reducedtothemodel:

Wefindthe m a x im u m o f thisC LF Theso lu ti on is notunique bec aus e fo re ac h α , β'and any non-degenerate G matrix, we have:∏= αβ'=αGG -1 β'=α ∗ β'*, withα ∗=αG;β'*=𝐺 −1 β'is asolutionapproach.

If thematrixΠ=αβ'hasno constraints,thenthemaximumisΠ=𝑆 01 𝑆 −1

However, the problem is to find the solution corresponding to the associationcondition, whichisr(Π)=r,ristheleveloftheαmatrixand theβ'matrix.

|𝑆 10 𝑆 −1 𝑆 01 − 𝜆𝑆 11 |=0 Solving the above system of equations will give m eigenvalues𝜆 𝑖and m eigenvectors𝜔 𝑖 Normalizethe result:𝜔′𝑆 11 𝜔=𝐼.

Then,thehighestplausibleestimateofthe matrix𝛽isprovidedby theformula:

The eigenvalues represent the canonical correlation between Ytvà Yt-1. Thiscorrelationcoefficientrepresentsthehighestcorrelationbetweenlinearcombinations of

Ytvà Yt-1 The co-integration relations can be seen to be linearcombinations of Yt-

1that are maximally correlated with linear combinations of∆Y𝑡underconstantcircumstances.

TheVECMmodel featurestheform: 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 Δyt= Πyt-1+C1Δyt-1+C2Δyt-2+…+Cp-1Δyt-p+1+ut

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

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

Then:Δ yt= αβyt-1+C1Δyt-1+C2Δyt-2+…+Cp-1Δyt-p+1+ut

GivenECt-1=βyt-1:non- stationarysequencecombinationsinyttoa stationarysequence,andECt-

1representstheresidualsofthesenon-stationarysequence combinations And ECt-

1represents the state of imbalance at time t-1, thenαrepresentstheadjustmentcoefficient ofΔytw h e nanimbalancearises.

After conducting tests, particularlythe stationarity of time series test, theregressionm o d e l w i l l b e e v a l u a t e d a n d c h o s e n W h e n e x e c u t i n g t h e t e s t , n o n - stationary time series should be changed to stationary by taking the difference ofhigherorder:

The Unit root test demonstrates, at a significance level of α= 0.05%, that allof them reject the Ho hypothesis regarding the presence of a unit root; therefore, theseriesstopsatthesameorderofdifference.Consequently,thedataseriesarestationarywiththe samedifferenceorder.

=0 (nocointegration betweenvariables),howeverwhenk =1(Atmost 1),p–value

Typically, it is possible to find the optimal delay for a model using the PACFchartoftheBOX-

JENKINapproachortheLogL,AIC,SC criteria.Inthisinstance,thecriteriaLR, FPE, AIC,andHQwill beemployedto identifyt h e optimal model latency There are numerous information criteria that can be used todetermine the model's lag In his study, Johansen (1990) demonstrated that theVECM latency is one order smaller than the VAR Correspondingly, the authorsdefinetheirhypothesizedlaginthepresentanalysis.

To assess the stability of the VECM model, use the AR Root Test to seewhether the solutions or eigenvalues are all less than 1 or contained within the unitcircle.Ifthisis thecase, then the VECM model is stable.

Thetestsdemonstratethatthestationaryserieshavethesameorderofdifference, and the cointegration test reveals a single cointegration, indicating thatthe selection of the VECM model was suitable The VECM model is guaranteed tobe stable and appropriate for regression when the right latency is used From there,the author draws findings based on analysis of variance decomposition and impulseresponsefunctions.

In order to determine the stationarity of time series, the author has performedtheunitroot test.Theresults demonstrated thatthedataseriesarest a ti ona ry withthe same level of association: I(1) Therefore, the Engle– Granger test or theJohansentestcanbeusedtodeterminewhetherornotthedataseriesarecointergrated.T heauthoremploystheVECMmethodbasedonthestudyofJohansen (1990) to test for cointegration if the stationary series have the same orderof difference Johansen performs a series of statistical tests to identify the number oflinked vectors, including checks for cointegration and tests to find the maximumnumber of data chain cointegrations The results indicate that the data series arecointegrated.T h e V E C M r e g r e s s i o n m o d e l i s s e l e c t e d C h e c k i n g f o r s t a t i o n a r i t y and cointegration of data series is necessary for determining the appropriate VECMmodel and avoiding spurious regression or particular error issues. Furthermore, thestationary variables have the same order of difference and are cointegrated suggeststhataregressiveVECMmodelisrequired(Grangeretal.,1987).

The VECM model does not differentiate between endogenous and exogenousvariableswhenanalyzingthemutualimpactofvariableswithinthemodel.Conseq uently, the VECM model has the advantage of evaluating both the short- andlong-term causal relationships between variables In addition, VECM can be appliedtoshort- timeseriesdata,makingitappropriateforVietnam's datasources.

In regression analysis involving time series data, if the regression modelcontains 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 explanatoryvariables of the model include one or more lagged values of the dependent variable,themodeliscalledautoregressivemodel.

NARDL regression model will be considered and selected after conductingtests, especially testing for stationary of time series Non-stationary time series willbestationarytransformedbytakingthedifferenceatahigherorder.

NARDL(Non- linearAutoRegressiveDistributedLag)permitsthedeterminationofthedisproportionali nfluenceofindependentvariablesonthedependentvariable: dYt=m+α1xdYt−1+α2xdYt−2+…+αnxdYt−1+β0xdXt+β1xdXt−1+…

Whereas dYtand dXtare the stationary variables after the difference, and utisthewhitenoise residuals dYt−nand dXt−nare stationary variables at lags.Yt:Dependent variable

Intermsoffinancialeconometrics,theNARDLmodeliscrucial.T h e purpose of this study is to investigate the effect of Vietnam's public debt on thecountry's rate of economic expansion using a dynamic regression model with anasymmetricaldistributionlag(NARDL):

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

Shin et al (2014) introduced asymmetry in their NARDL regression model by separating positive and negative coefficients of the explanatory variables This asymmetry allows for the analysis of both short-run and long-run dynamics in time series data, making the model applicable to real-world settings and particularly relevant in economic studies The resulting long-term asymmetric NARDL regression model is represented as follows: yt = β + β+ x t + β- x t + ut, where yt is the dependent variable, xt is the explanatory variable, β is the constant term, and β+ and β- are the coefficients for the positive and negative changes in xt, respectively.

Toc o n d u c t N A R D L a s y m m e t r i c r e g r e s s i o n , t h e x t a n d y t s e r i e s m u s t s t o p witht he h i g h e s t d i f f e r e n c e o f 1 w i t h xtisd e c o m p o s e d i n t o : : x t  x 0  x  x  I n which,xt + a n dxt - r e p r e s e n tt h e p o s i t i v e a n d n e g a t i v e e f f e c t s o f t h e i n d e p e n d e n t variablexwiththe dependentvariabley: t t

Ifztd o e sn o t c h a n g e , yta n dxta r ea s y m m e t r i c c o - i n t e g r a t i o n T h e n o r m a l (symmetric)l i n e a r i t y is a s pe c i a l ca se o f ( 4 ) , o b t a i n e d w h e n :     and    

Shinetal suggest theasymmetry modelonthisbasis,theNARDL(p,q): p q y  y    (   ' x     ' x  ) (5) j1 j0

 ' x  represents the ECM asymmetry coefficient Shin et al propose the following reduced formbasedontheexpressionofthecorrelationbetweenregressionandresiduals inexpression (6): q1

Equation (9) is the NARDL asymmetric regression model demonstrating thenonlinear effects of the independent variable xt on the dependent variable yt in theshort run and long run to identify the asymmetric relationship According to

Public debt can have complex effects on economic growth While it can be positive within certain limits, excessive debt can lead to negative impacts To investigate these nonlinear effects, a NARDL research model was constructed This model enables the analysis of sign and regression coefficients, providing insights into the direction and magnitude of public debt's impact on economic growth.

VARIABLESDESCRIPTIONSOFTHERESEARCHMODEL

3.2.1 Thevariables of the model of the relationship between fiscal policyandthebusinesscycle

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

Variables Symbol Ratios/ Calculation method

Vietnamproduction GDP GDP index(%) IMF

Publicdebts LNLIA LIAindex, logarithm IMF

Government spending is widely considered the key determinant of fiscal policy stability (Debrun & Kapoor, 2011; Furceri & Jalles, 2016; Afonso & Jalles, 2013) According to Keynesian theory (1936), fluctuations in economic growth cause economic cycles characterized by peaks and troughs To study this relationship, researchers employ economic growth (GDP) to represent the business cycle and government spending to represent fiscal policy.

The study includes five variables, which are presented in detail in Table 3.2:economicgrowth,governmentspending,lendinginterestrates,U S D / V N D exch ange rate, and government debt The independent variable GDP symbolizeseconomicgrowth,whereaspublicdebtrevealsthegovernment'sdomesticand foreigndebtlevels.Inaddition,thestudyemployscontrolvariables,includinggovernment expenditures, lending interest rates, and the USD/VND exchange rate.These are the transmission factors associated with monetary policy and fiscal policyfor analyzing the effect of public debt on economic growth These model variablesare consistent with theory and prior empirical research (Mencinger et al., 2015;ChecheritaandRother,2010;Bexhetietal.,2020).

LIA Publicdebt Logarit Asymmetric variable

EXP GovernmentExpenditures Logarit Control variableIRB Lendingrate % Control variableUSD/VND00 USD/VNDexchangerate

RESEARCHDATA

3.3.1 Researchdataofthe modeloftherelationshipbetweenfiscalpolicy andthe businesscycle Table3 3 Descriptivestatisticsofthevariables

The data is applicable for the years 2000 through 2021 The percentage ofVietnam's gross domestic product (GDP) is derived from the IMF's internationalfinancial data Government Spending Variables, Government TaxRevenue, andGovernment Debt are collected from from IMF international financial statistics Thegovernment's expenditure; Government tax revenue and government debt is a trendvariable 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 thatthev a r i a b l e h a s a d i s t r i b u t i o n c l o s e t o t h e d i s t r i b u t i o n s t a n d a r d a n d m e e t s t h e model's input data conditions In addition, variables with an annual frequency arefrequently affected by the seasonal factor Using the Census X12 tool, this studyisolatestheimpactoftheseasonalelementfromthedataseries.

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/ VND00are regularly distributed, whileEXP has a large standard deviation,a highm e a n , anda severely skewedJarque-Beraindex.

Value IRB GDP LIA USDVND EXP

IMFfinancialstatistics(IFS)quarterlydataareusedtoexaminet h e nonlinear influence of public debt on Vietnam's economic growth over the periodfrom the first quarter of 2000 to the first quarter of 2021 Vietnam's gross domesticproduct(GDP)andlending rate (I RB )a re expressed as apercentage

;government debt(LIA),governmentspending(EXP), andUSD/VND00arenon- normallydistributed propensity variables,thusthey mustbetransformedtologarithmicform.

EXAMININGTHERELATIONSHIPBETWEENFISCALPOLICYAND THEBUSINESSCYCLE

When analyzing time series data, a model is considered credible if the dataseries used in the research are stationary data series A time series Y t is stationary ifthree conditions are met: its mean and variance are constant over time, and thecovariance between Ytand Yt-sdepends only on the distance between the two timepoints s andnot on the time t If the time series are not stationary,t h e r e g r e s s i o n mayproduceerroneousresults.

IfH o i s a c c e p t e d a t s i g n i f i c a n c e l e v e l α , t h e t i m e s e r i e s i s n o n - s t a t i o n a r y , whereas if Ho is rejected, the time series is stationary The Dickey-Fuller unit roottest was conducted to test the stationary of the series LNEXP and GDP respectively.Resultsindicatethattheseriesdoesnotstopatd=0

Hypothesized Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

The results of the test indicate, with a significance level of α = 0.05, that allaccept Ho hypothesis of the presence of a unit root, therefore the series EXP, TAX,LIA,andGDPdonotstopatthedifferenced=0.

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

Using a significance level of α = 0.05, the unit root test results indicate thatthe 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 dataseries are stationary with the same difference order, then the cointegration test willcontinuetobe conducted.

Since the data series are stationary with the same order of difference (d=2),theJohansentestisperformedtocheckwhethertheseriesEXP,TAX,L IA,GDParecointegration ornot.

No.ofCE(s) Eigenvalue Statistic CriticalValue Prob.**

**MacKinnon-Haug-Michelis (1999) p-valuesUnrestricted CointegratingCoefficients(normalizedbyb'*S11*b=I):

Source:RegressionResults 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