CHAPTER 1: INTRODUCTION OF THE RESEARCH 1.1 THE RATIONALE OF RESEARCH A number of economies continue to experience below-average growth several years after the global financial crisis. Medium-term growth projections have been revised downward since 2011, which indicates the uncertainty surrounding the outlook for medium-term economic growth. Simultaneously, the ratio of public debt to GDP has skyrocketed in numerous developing market economies, reaching historic highs in a number of nations. In this context, the question is how fiscal policy interacts with the economic growth cycle. Fiscal policy (government spending, taxes, subsidies, etc.) and monetary policy (money supply, interest rates, exchange rates, etc.) are utilized by the government to intervene in the economy during periods of recession or rapid growth. Those policies are separated into pro-cyclical and counter-cyclical stages based on the recession or economic growth cycle. A pro-cyclical fiscal policy is defined as the policy aims to balance the government budget. For instance, if there is a budget deficit, it is necessary to increase tax revenues and decrease government spending. A fiscal strategy with the purpose of restoring output to its potential level is countercyclical. To attain potential output levels during a recession, the government continues to increase government spending and cut tax receipts (Keynes, 1936). Governments in developed nations frequently employ a countercyclical fiscal policy. This can be explained by an expansionary fiscal policy during economic contraction and a contractionary fiscal policy during economic expansion. The automated stabilizing instruments are used by developed countries to achieve the countercyclical fiscal policy. When unemployment is high, unemployment insurance and social transfer payments are increased. As declining personal income reduces government tax collection, tax policy can potentially reverse the cycle. While the economy exhibits signals of contraction, expansionary fiscal policy is enacted (Acemoglu et al., 2013; Fatas and Mihov, 2013).While macroeconomic policy in developed nations is primarily targeted at stabilizing the economic cycle, countercyclical fiscal policy is implemented to accumulate in the expansion period. In developing nations, the macroeconomic policy is procyclical. Those economies frequently increase investment and public spending throughout the recovery phase of the economy to catch up with developing nations. The government, particularly the local authorities, desires to increase spending when the economy is expanding. Developing nations frequently lack automatic stabilization instruments during economic recession. For instance, unemployment insurance payouts are infrequent, and social transfers represent a negligible portion of the budget. In developing nations, the majority of expenditures are comprised of government consumption and wages. Additionally, indirect taxes (trade and consumption taxes) sometimes replace direct taxes in emerging countries (income taxes). In order for the government to achieve its long-term macroeconomic management objectives, it must employ fiscal policy effectively and at the appropriate moment during a recession or rapid economic expansion (Talvi and Vegh, 2005). Through the use of fiscal policy, the government intervenes to restore economic equilibrium. An unfavorable impact on the economy can have both immediate and long-term repercussions if the wrong decision is made. Consequently, it is crucial to determine the most effective fiscal policy instruments required to support economic growth. In order to fund global government budgets and promote economic growth, sustainable funding policies are needed. Frequently, when tax collections fall short of projected government spending, there is no other option than to increase taxes or borrow money either domestically or internationally (Owusu-Nantwi and Erickson, 2016). When governments employ borrowing as an alternative to taxation, this results in public debt (Ogunmuyiwa, 2011). Consequently, public debt consists of the government's short- and long-term loans used to support public expenditures due to insufficient public revenue. As a result of the worldwide economic crisis following World War II, many economies (including wealthy and 174 emerging nations) were forced to borrow locally or internationally to pay their budget deficit.These efforts have led to the accumulation of public debt in many nations, causing economic recession and financial crises in the early 2000s in numerous developed and developing nations (Donayre and Taivan, 2017). The government uses the public debt as a key tool to finance national development. The use of debt to finance expenditures that will ultimately increase productivity and stimulate the economy. However, empirical research on public debt, such as those conducted by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014), indicate that public debt will have a negative effect on economic growth once it exceeds a particular threshold. According to Mankiw (2013), the government expenditure deficit surpasses the self-accumulation that can be paid by domestic and international businesses. Public debt encompasses both international and domestic obligations. Rahman (2012) defines public debt as a circumstance in which the quantity of valuable documents possessed by the government is insufficient to compensate the deficiency in previous expenditures. According to macroeconomic theory, a government debt utilized to pay spending in productive areas such as health, education, and nutrition will have a beneficial impact on economic growth (Freeman, & Webber 2009). If the rate of return on government debt is higher than the rate at which the government receives paid for its services, then the country will gain from the debt incurred by the government, and vice versa. Presently, rising national debt is a global phenomenon. Total public debt has long been cited as a major subject of concern by both financial and monetary policymakers. Public debt, particularly debt spending programs, plays a vital role in achieving rapid economic growth. According to Elmendorf and Mankiw (1999), debt can increase aggregate demand and output in the short term, but lower capital and output in the long term. Governments rely heavily on public debt to finance a nation's economic development. Debt is utilized to fund expenditures that will ultimately increase productivity and stimulate economic growth. Nonetheless, empirical research on public debt, such as those conducted by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014), indicate that public debt will have a negative effect on economic growth once it beyond a certain threshold number. According to Mankiw
INTRODUCTION OF THE RESEARCH
THE RATIONALE OF RESEARCH
Many economies are still facing below-average growth years after the global financial crisis, with medium-term growth projections revised downward since 2011, highlighting uncertainty in economic outlooks Concurrently, public debt to GDP ratios have surged in various developing market economies, hitting historic highs in several countries This raises important questions about the interaction between fiscal policy and the economic growth cycle.
Fiscal and monetary policies are essential tools used by the government to manage the economy during recession or growth phases These policies are categorized as pro-cyclical or counter-cyclical, depending on the economic cycle Pro-cyclical fiscal policy focuses on balancing the government budget, often requiring increased tax revenues and reduced spending during budget deficits In contrast, counter-cyclical fiscal policy aims to restore output to its potential level by increasing government spending and lowering tax receipts during economic downturns (Keynes, 1936).
Developed nations often utilize countercyclical fiscal policy to stabilize their economies, implementing expansionary measures during economic downturns and contractionary measures during periods of growth Automated stabilizing instruments play a crucial role in this approach, increasing unemployment insurance and social transfer payments when unemployment rises Additionally, as personal income declines and tax revenue decreases, tax policy adjustments can help reverse negative economic trends In times of economic contraction, expansionary fiscal policies are actively pursued to foster recovery (Acemoglu et al., 2013; Fatas and Mihov, 2013).
In developed nations, macroeconomic policy focuses on stabilizing the economic cycle, using countercyclical fiscal measures to build reserves during expansion Conversely, developing countries often adopt a procyclical approach, increasing investment and public spending during economic recovery to catch up with their developed counterparts Local authorities in these nations tend to boost spending in times of growth, yet they often lack automatic stabilization tools during recessions, such as unemployment insurance and significant social transfers Consequently, government expenditures primarily consist of consumption and wages, with indirect taxes frequently replacing direct taxes To effectively manage long-term macroeconomic goals, it is crucial for governments in developing nations to implement fiscal policies strategically during periods of economic downturn or rapid growth.
The government utilizes fiscal policy to restore economic equilibrium, as poor decisions can lead to immediate and long-term negative effects on the economy Therefore, identifying the most effective fiscal policy tools is essential for promoting sustainable economic growth.
To support global government budgets and stimulate economic growth, it is essential to implement sustainable funding policies When tax revenues do not meet anticipated government expenditures, the typical responses are to either raise taxes or secure loans from domestic or international sources.
Governments often resort to borrowing instead of taxation, leading to the accumulation of public debt, which comprises both short- and long-term loans aimed at financing public expenditures when revenue falls short The global economic crisis post-World War II compelled numerous economies, including both developed and emerging nations, to seek local or international loans to address their budget deficits.
The accumulation of public debt in numerous nations has resulted in economic recessions and financial crises, particularly in the early 2000s, affecting both developed and developing countries (Donayre and Taivan, 2017).
The government leverages public debt as a vital instrument for financing national development, aiming to enhance productivity and stimulate economic growth However, studies by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014) reveal that excessive public debt can negatively impact economic growth once it surpasses a certain threshold Mankiw (2013) notes that government expenditure deficits can exceed the self-accumulation capabilities of domestic and international businesses Public debt includes both domestic and international liabilities, and as defined by Rahman (2012), it arises when the government's valuable assets are inadequate to cover past expenditures Macroeconomic theory suggests that when government debt is allocated to productive sectors like health, education, and nutrition, it can positively influence economic growth (Freeman & Webber, 2009).
When the return on government debt exceeds the revenue generated from government services, the country benefits from the incurred debt; however, the opposite is true when the return is lower Currently, the rise in national debt is a global concern, with public debt being a significant focus for financial and monetary policymakers While public debt, particularly through spending programs, is essential for fostering rapid economic growth, research by Elmendorf and Mankiw (1999) suggests that it can boost aggregate demand and output in the short term but may hinder long-term capital and output Governments often depend on public debt to finance economic development initiatives that enhance productivity and stimulate growth However, studies by Reinhart and Rogoff (2010) and Panizza and Presbitero (2014) reveal that excessive public debt can negatively impact economic growth once it surpasses a certain threshold.
In 2013, the government's expenditure deficit exceeded the self-accumulation capabilities of domestic and international businesses, leading to a reliance on public debt, which includes both local and international obligations Rahman (2012) explains that public debt arises when the government's valuable assets are insufficient to cover prior spending deficits Macroeconomic theory suggests that government debt, when invested in productive sectors like health, education, and nutrition, can positively influence economic growth (Freeman & Webber, 2009).
Creating a budget surplus is a significant challenge for nations, making public debt an inevitable reality (Adom, 2016) However, when public debt reaches unsustainable levels, it can impede economic growth by diminishing a country's competitiveness and heightening the vulnerability of its financial markets to international shocks (Cochrane, 2011a; Castro et al.).
While borrowing for public spending can support economic growth, inadequate control over such debt can negatively impact it The debt crises of the 1970s and 1980s highlighted the consequences of poor debt management in low- and middle-income countries, where the reliance on short-term loans for long-term projects led to repayment challenges Scholars have differing views on the relationship between public debt and economic growth, with some finding positive effects, others negative, and some seeing no correlation at all Economists argue that the real issue lies in the mismanagement of debt rather than the debt itself Evidence indicates that effective laws promoting conditional lending can enhance the success of aid, emphasizing the significant short- and long-term effects of public debt on the economy There remains a notable disconnect between theoretical perspectives and practical outcomes regarding public debt and economic growth.
5 has also contributed to the disparities in policy approaches among the examined nations
Vietnam's national debt is considered manageable, yet it poses challenges to the country's economic development ambitions High public debt can adversely affect economic growth, creating obstacles that warrant significant attention The relationship between government debt, taxation, and spending remains a crucial topic in global economic policy discussions While the origins and consequences of public debt in developing nations are still debated, its negative impact on economic growth is evident Recent financial crises have highlighted the connection between public debt and economic performance, particularly in Asian countries, which are the largest borrowers among emerging economies These nations have faced two significant crises—the Asian financial crisis of 1998 and the global financial crisis of 2008—resulting in increased public debt-to-GDP ratios and underscoring the urgency of addressing rising debt levels in this rapidly developing region.
Unlike many global studies that focus on the relationship between public debt and economic growth in developed nations or those with established market economies, this research specifically examines Vietnam Domestic analyses often identify thresholds or cease further exploration of this relationship However, Vietnam's unique state-managed economic operating mechanism presents distinct differences from other countries Additionally, both theoretical and empirical evidence indicate that excessive reliance on and sustained high levels of public debt can adversely affect economic growth.
RESEARCH OBJECTIVES
This study aims to explore the causal relationship between fiscal policies and economic cycles in Vietnam, focusing on quantifying the asymmetric effects of governmental debt on economic growth The findings regarding the asymmetric impact of public debt on economic growth will inform recommendations for effective fiscal policies in Vietnam.
To accomplish the objective, the research must address the following specific aims:
(1) Assessing the impact of fiscal policy determinants on economic growth in Vietnam
(2) Determine the impact of fiscal policy on Vietnam's economic expansion
(3) Examining the asymmetric impact of public debt on economic growth in Vietnam
(4) Analysing the effects and repercussions of the policy of public debt on the expansion of the Vietnamese economy
To achieve the goals of this thesis, it is necessary to respond to the following questions:
(1) Does Vietnam's fiscal policy have a causal relationship with economic growth?
(2) What is the extent of fiscal policy's influence on economic expansion?
(3) Does public debt have an asymmetric impact on economic growth in Vietnam?
(4) How does an increase in public debt to a certain level have a negative impact on Vietnam's economic growth?
OBJECTS, SCOPE AND METHODOLOGY OF THE RESEARCH
This study investigates the relationship between economic growth and public debt in Vietnam from Q1 2000 to Q1 2021, focusing on fiscal policy indicators such as total tax income, government debt, and spending in relation to the business cycle Utilizing quarterly data sourced from IMF financial statistics, key variables analyzed include Vietnam's GDP, growth of the money supply, lending rates, public debt, the USD/VND exchange rate, and government spending Due to the non-normal distribution of these trend variables, logarithmic transformation is applied, and calculations are adjusted by comparing exchange rates to the base year rate from Q1 2000.
This study employs the VECM model to analyze the relationship between fiscal policy and Vietnam's business cycle, utilizing quantitative research methods Additionally, the NARDL asymmetric regression model is applied to investigate the unequal impact of public debt on Vietnam's economic growth Based on these findings, the thesis offers recommendations for developing policies related to the national debt of Vietnam.
This thesis employs the Vector Error Correction Model (VECM) framework to analyze the relationship between fiscal policy and the economic cycle Although the VECM model does not distinguish between endogenous and exogenous factors, it is suitable for investigating the causal link between fiscal policy and the economic cycle in both the short and long term A key requirement for utilizing the VECM is
The NARDL (Nonlinear Autoregressive Distributed Lag) model is utilized to explore the asymmetric impacts of public debt and fiscal policy characteristics on economic growth in Vietnam, particularly within the context of the economic cycle For effective application of this model, it is essential that the data series demonstrate the same level of integration through differencing and exhibit cointegration, with the primary requirement being integration at the highest level of differencing, specifically of order 1 This analysis is grounded in the observed causal relationship between fiscal policy and the economic cycle.
THE SIGNIFICANE AND CONTRIBUTIONS OF THE RESEARCH
This study contributes to the understanding of the impact of public debt on economic growth by integrating theoretical frameworks with empirical research, addressing existing gaps in the literature, and presenting novel insights.
The relevance and theoretical contribution to science of the research
This paper explores the relationship between public debt and economic growth in Vietnam, a nation transitioning to a market economy with unique challenges By applying theoretical foundations to a research sample that includes either industrialized or developing countries, the study aims to clarify the relevance of scientific theories in the context of Vietnam's distinct economic characteristics The findings will assess the consistency of these results with existing theories and prior empirical studies.
Contribution to empirical research, and practical importance
Domestic research predominantly focuses on qualitative analysis, whereas international studies often employ linear or threshold methodologies This article presents a model that examines the asymmetric effects of public debt on Vietnam's economic growth Additionally, the author revises the study to reflect more dynamic and interconnected real-world scenarios characterized by highly liberalized capital flows.
9 currency rates are more volatile, and global economies are dynamic The economies of the countries have experienced numerous fluctuations in recent years
This study enhances the existing empirical evidence by addressing two key aspects: it explores the impact of the public debt-to-GDP ratio threshold on economic growth specifically in developing and transitional countries, with a focus on Vietnam, an area that has seen limited research Additionally, it reveals that Vietnam's public debt exerts an asymmetric effect on its economic growth.
RESEARCH CONTENTS
This research consists of five chapters:
Chapter 1: Introduction of The research In this part, the topic will clarify the overview contents of the research topic including: necessity of the research, research objectives, research questions, research object and scope, research methods and significance of the topic
Chapter 2: Theories and Literature Review The relationship between fiscal policy and the economic cycle is discussed in Chapter 2 The topic will provide a summary of the theories and experiments underlying the connection between public debt and economic growth Regarding the theoretical literature, four schools of thought (Classical, Keynesian, Ricardian, and Modern Monetization) have presented varying explanations regarding the causal relationship between public debt and economic growth
Chapter 3: Research Methodology The topic describes the research model, model variables, data used, and data processing procedures In the following chapter, the study uses the VECM model to test the relationship between fiscal policy and the economic cycle of Vietnam and the NARDL model to test the asymmetric impact of public debt on Vietnam's economic growth
Chapter 4: Research results and Discussion On that basis, the study uses the
VECM model to test Vietnam's pro-cyclical fiscal policy A dynamic regression model with asymmetrical distribution lag (NARDL) is being used to investigate
10 whether public debt has an asymmetrically negative influence on Vietnam's economic growth
Chapter 5: Conclusions and Policy Implications Chapter 5 summarizes the results of Chapter 4 to answer the research questions In addition, the study also points out some policy implications of fiscal policy and economic growth in Vietnam
THEORIES AND LITERATURE REVIEW
THEORIES OF FISCAL POLICY AND BUSINESS CYCLE
2.1.1 Concepts relevant to the research problems
2.1.1.1 The concept of fiscal policy
Fiscal policy is a key component of macroeconomic strategy that affects economic activity by adjusting government spending and taxation Its main objectives include mobilizing financial resources to fulfill state expenditures, promoting economic restructuring for stable growth, stabilizing markets and commodity prices, and redistributing income among various social classes (Furceri and Jalles, 2016).
Fiscal policy, comprising government expenditure and revenue, significantly influences real GDP growth through adjustments in spending and taxation Its key objectives include mobilizing financial resources for state needs, promoting economic restructuring, ensuring stable growth, stabilizing market prices, and redistributing social income among different population classes (Furceri and Jalles, 2016).
The government utilizes fiscal and monetary policy to manage the economy during periods of recession or rapid growth These policies are categorized into procyclical and countercyclical stages based on the economic cycle Procyclical fiscal policy aims to balance the budget by increasing tax collection and reducing government spending during deficits Conversely, countercyclical fiscal policy focuses on restoring output to its potential level, particularly during recessions, to stimulate economic recovery.
12 government continues to raise government spending and decrease tax receipts (Keynes, 1936)
Developed nations often utilize a countercyclical fiscal strategy, implementing expansionary fiscal policies during economic recessions and contractionary policies during periods of expansion This approach is supported by automated stabilizing instruments, which increase unemployment insurance and social transfer payments when unemployment rises Additionally, as personal incomes decline and tax revenues decrease, tax policies can help reverse economic downturns Consequently, when signs of economic contraction appear, expansionary fiscal measures are activated to stimulate recovery (Acemoglu et al., 2013; Fatas and Mihov, 2013).
In developed countries, macroeconomic policy primarily aims to stabilize the economic cycle through countercyclical fiscal measures that accumulate during expansion phases Conversely, developing nations often adopt pro-cyclical policies, increasing investment and public spending during economic recoveries to catch up with developed economies Local governments in these countries tend to boost spending when the economy is thriving, yet during downturns, they often lack automated stabilization tools, with infrequent unemployment insurance and minimal social transfers Most expenditures are directed towards government consumption and wages, with indirect taxes frequently replacing direct taxes To effectively manage long-term macroeconomic goals, it is crucial for governments in emerging economies to utilize fiscal policy strategically during periods of recession or rapid growth.
2.1.1.2 The concept of the Business Cycle
The business cycle explains the expansion and contraction of an economy The economic cycle is the economy's response to real shocks, such as technological
13 advancements, natural disasters, and conflict Negative or positive economic fluctuations can spread and generate cycle fluctuations (Kydland & Edward, 1982)
Over the last twenty years, many countries have faced economic cyclicality triggered by the financial crises of 1997 and 2008 Economic cycles remain unpredictable and erratic, lacking a precise formula for forecasting their timing and duration In response, governments are investigating the effectiveness of fiscal and monetary policies to stabilize the economy, while ongoing research aims to mitigate the risks of economic crises and overheating.
The economic cycle is influenced by market fluctuations that lead to periods of recession and recovery Fiscal and monetary policies play a crucial role in addressing economic shocks, significantly affecting the future trajectory of the economy (Keynes, 1936).
2.1.2 Theories of Fiscal Policy and Business Cycle
Keynesian theory posits that prices and wages adjust slowly to demand fluctuations, which can hinder economic recovery To facilitate a smoother recovery from recessions and expansions, countercyclical fiscal policy is essential This approach involves decreasing taxes and increasing spending to boost aggregate demand during economic downturns, while reducing spending and encouraging savings during periods of growth However, the effectiveness of this policy may be limited in developing countries with less robust social safety nets (Thornton, 2008).
From a neoclassical viewpoint, fiscal policy aims to minimize economic fluctuations Barro's (1979) hypothesis suggests that to ensure spending and tax shocks are temporary, tax rates should remain constant throughout the business cycle Consequently, there should be a positive correlation between budget balance and output, as it adjusts for variations in tax revenues caused by tax shocks and changes in other incomes and expenditures (Fatás and Mihov, 2009; Chari et al., 1994).
Keynes (1936) argued that the private sector alone would not generate enough savings for economic development in low-income developing countries (LDCs) Consequently, Keynesian economists have long advocated for these nations to increase tax burdens and decrease recurrent spending to enhance government savings They also recommend boosting public investments through foreign loans, a strategy prominent in the 1960s to 1980s However, these policies face criticism for lacking specificity in macroeconomic analysis and overlooking crucial aspects of fiscal policy, such as efficient resource allocation, equitable distribution, and long-term stability, while overly focusing on short-term growth Additionally, the Keynesian approach fails to acknowledge that government spending must be funded through taxation and debt, leading to skepticism about its effectiveness, especially during the economic downturn of the 1970s and the subsequent boom following tax cuts and austerity in the 1980s.
Keynes posited that government intervention through tax increases and expanded spending is essential to address economic crises and high unemployment, thereby influencing the business cycle By investing public funds, government spending boosts aggregate demand, funded by tax revenues, which can inadvertently reduce consumption and corporate profits Additionally, the government may raise funds through the sale of bonds and borrowing However, this approach risks escalating the budget deficit and increasing the state’s debt burden, potentially leading to further economic deterioration and adverse effects on business conditions and productivity.
To promote demand, taxes must be lowered, but tax cuts produce budget deficits and reduce government spending; if government spending rises, the marginal
15 efficiency of capital is likely to decline It also creates inflation and increases the budget's debt burden (Dinh Van Thong, 2009)
Many economists have long viewed budget deficit reduction as essential for economic growth, arguing that lower government spending leads to decreased deficits, lower interest rates, increased investment, and enhanced productivity However, this relationship may be overstated, and both Keynesian and non-Keynesian economists often overlook the significance of government expenditure levels While Keynesians focus on substantial government spending to combat economic stagnation, there is a growing consensus that both spending cuts and increases can be beneficial depending on the economic context Historical trends from the 1930s and 1960s saw the rise of large government programs due to market failures, but by the 1970s and 1980s, the drawbacks of such spending became evident, prompting a closer examination of government failures Key factors contributing to government failure include slow policy implementation, limited information, bureaucratic inefficiencies, and the constraints of political processes.
The most ideal form, according to current contempotary economic theory, is a mixed economy with a balanced role for the government and the market (Mankiw,
2005) The government manages the market using tax, expenditure, and regulatory programs within a market economy model that decides prices and output Market
The interplay between government and market dynamics is crucial for economic management, as relying solely on one is ineffective While market economies enhance production and distribution efficiency, they also present challenges that require government intervention to ensure fairness and stability The endogenous growth model, as articulated by Barro (1979), serves as a vital theoretical basis for modern fiscal policy, highlighting its short-term and long-term impacts on economic growth and social issues, akin to Keynesian theory Distinguishing these effects can be complex, yet this framework enables governments to make informed fiscal adjustments By integrating the "visible hand" of the State with the "invisible hand" of the market, fiscal policy can more effectively address questions regarding tax revenue collection, equity, and the allocation of resources to rectify market failures and enhance sector strengths, revealing a more dynamic understanding of budgetary balance (Dinh Van Thong, 2009).
THEORETICAL OF PUBLIC DEBT AND ECONOMIC GROWTH
Public revenue sources, including taxes, duties, fees, and fines, are essential for funding public spending However, states often encounter budget deficits due to significant infrastructure investments, wars, financial developments, natural disasters, economic crises, and routine expenditures To address these challenges, public sector borrowing is frequently considered as a solution.
Public debt, often termed state debt, is the legal obligation of a government to repay both the principal and interest to its creditors according to a specified schedule It represents the financial commitments that a state has undertaken, reflecting its reliance on borrowing to fund various public expenditures.
Borrowing by government and public institutions is permissible in specific situations, such as for major infrastructure projects and wartime expenses; however, it should be limited and not prolonged Post-World War II, public debt surged and evolved due to the need to rebuild economies and infrastructure in war-torn nations Additionally, developing countries have unique financial needs that have influenced borrowing practices The establishment of international organizations like the International Monetary Fund (IMF) and the World Bank (WB) has transformed the borrowing landscape, moving it beyond transnational efforts to a more structured approach (Ulusoy et al., 2013).
Public debt, as defined by the World Bank Report of 2015, refers to all of the government's explicit contractual obligations that remain unmet after a specified deadline This debt includes a mix of domestic and international liabilities, such as loans, cash reserves, and currency-related securities.
In the era of globalization, the mobility of capital has surged, intensifying financial competition in the global market Developing countries are increasingly turning to public debt as a means to finance their growth, utilizing various incentives such as low taxes and interest rates to attract international short-term capital However, the volatility of capital flows, combined with these incentive mechanisms, has led to a troubling cycle of external debt for these nations Irresponsible borrowing, perceived as easy income, can result in economic downturns, wasteful capital expenditure, and an unsustainable debt burden that ultimately affects future generations due to inefficient public spending.
2.2.2 Classical theories of public debt and economic growth
Classical economics founder David Ricardo (1817) argued that public debt can obscure a country's true financial status, resulting in irrational public spending This theory suggests that the illusion of paper wealth can lead to economic mismanagement.
Consumer demand is declining, leading to reduced investment and slower growth in capital and consumer goods Classical economists argue that government spending funded by debt fails to fully counteract the adverse effects of crowding out private investment, ultimately causing economic slowdown Consequently, government borrowing from the domestic market can trigger a liquidity crisis and increase interest rates, which further deters private investment.
Ricardo argues that the overall economic level significantly influences demand, regardless of whether financing comes from debt equity or tax increases He posits that raising taxes can enable debt repayment and subsequently boost individual incomes through government bonds Conversely, when the government reduces taxes and finances its deficit via bond issuance, households may increase consumption but remain cautious, anticipating future tax hikes to address the debt, which can have a prolonged impact on economic growth The classical economic perspective holds that public debt impedes growth by undermining fiscal discipline and limiting private sector access to credit Furthermore, the repayment of public debt, particularly foreign debt, can deter private investment and dissuade potential foreign investors, further stifling economic advancement.
Changes in government spending and the corresponding rise in public debt influence private saving patterns, suggesting they do not significantly affect real economic growth As Ricardo (1817/1951) observed, the real economy's performance is not reliant on the government's ability to enhance revenue through taxation or debt issuance under specific conditions.
"On the Principles of Political Economy and Taxation" were Ricardo's 1820 and
In 1877, significant research explored the impacts of public debt on resource allocation and economic growth In the 20th century, economists Barro (1974) and Buchanan (1976) further advanced Ricardo's theory in their influential articles, "Are Government Bonds a Net Asset?"
"Is public debt comparable to taxes?" Barro and Buchanan's theoretical and empirical contributions led to what is now known as the Barro-Ricardo Equivalence
The Ricardian Equivalence Hypothesis (REH), supported by Barro (1989) and Buchanan (1976), posits that public debt does not adversely impact the economy as long as solvency is maintained REH suggests that government debt solely influences financial mobility among economic agents, with Buchanan arguing that it only affects private spending and saving decisions without impacting net economic growth Consequently, variations in domestic and foreign public debt are deemed independent of key macroeconomic indicators like total investment and production, implying they do not drive economic growth From a neoclassical viewpoint, expansionary fiscal policies are ineffective in altering economic performance, leading to the conclusion that government debt cannot serve as an economic stimulant, as stated in the Barro-Ricardo Equivalence Theory.
Ricardo's theoretical framework is based on six key assumptions: a perfect capital market that allows free borrowing, a constant growth rate of the population (taxpayers), rational decision-making by economic agents and consumers, intergenerational transfers, a future tax burden that ensures services for those benefiting from initial tax cuts, and the absence of outstanding taxes (Barro, 1974, 1989; Buchanan, 1987) Consequently, Barro argues that any change in government funding strategies will lead to an equivalent adjustment in private savings to counterbalance shifts in public savings (Elmendorf & Mankiw, 1999).
From a Keynesian perspective, public debt increases when the government engages in significant deficit spending to address economic circumstances Keynesians argue that high levels of public debt are manageable, as the interest revenue generated from this debt can offset its costs Keynes himself opposed any attempts to reduce or stop the growth of government debt, believing that it plays a crucial role in stimulating economic activity.
Public expenditures funded by debt stimulate job growth, leading to reduced unemployment and increased workforce participation This creates a multiplier effect that positively impacts national output and income.
Keynesian economic theories suggest that government debt does not hinder consumption, as borrowed funds are reinvested to stimulate demand through wages and capital expenditures However, this perspective overlooks the challenges of addressing budget deficits via increased tax revenues or borrowing, leading to a tax burden on citizens when rates rise to manage debt Consequently, taxpayers may seek to minimize their tax liabilities by reducing employment and savings, prompting further tax increases This cycle diminishes the after-tax income ratio, negatively impacting national income and savings Additionally, rising interest income can push many households into higher tax brackets, especially in countries with elevated tax rates Ultimately, this viewpoint significantly underestimates the economic implications tied to public debt issuance.
RELEVANT EMPIRICAL STUDIES ON THE RELATIONSHIP BETWEEN
2.3.1 Literature review of procyclical fiscal policy
Gavin and Perotti (1997) found that fiscal policy in 13 Latin American countries from 1968 to 1995 was pro-cyclical, contrasting sharply with the counter-cyclical approach of developed nations They noted that during economic expansions, the government budget surplus increases by 0.25 percent for every 1 percent GDP growth, while during recessions, both the deficit and GDP decline by 1 percent This pro-cyclical fiscal behavior led to significant economic losses during periods of slow growth Additionally, the study highlights the "greedy effect," where political interest groups influence spending decisions more during economic booms, resulting in political distortions (Ilzetzki and Vegh, 2008).
A study examining the cyclical effects of fiscal policy on the business cycle revealed a pro-cyclical nature of fiscal policy in developing countries, utilizing various econometric models and GMM regression analysis Additionally, the research highlighted the reverse causality between fiscal policy and economic cycles, underscoring the complex interplay in these economies.
(1998) has shown that Irish fiscal policy is pro-cyclical
Talvi and Végh (2005) found that procyclicality of fiscal policy is common across 36 developing countries, not limited to Latin America, with a positive correlation between government expenditure composition and GDP (mean coefficient of 0.53) Similarly, Thornton (2008) reported that real government consumption is procyclical in 32 out of 37 African nations from 1960 to 2004 Manasse (2006) highlighted significant differences in the economic cyclicality of fiscal policy between developing and developed countries, attributing these disparities to the more pronounced economic shocks experienced by developing nations.
Kaminsky and Végh (2004) conducted a study on the cyclicality of capital flows, fiscal policy, and monetary policy across 104 countries from 1960 to 2003 Their findings revealed that capital flows are procyclical in both OECD and emerging nations Additionally, they found that fiscal and monetary policies tend to be procyclical in most developing countries, particularly in upper middle-income nations, while OECD countries exhibit countercyclical monetary policies Furthermore, in developing countries, the cycles of capital flows and macroeconomic activity are interlinked, with periods of capital inflow corresponding to expansionary macroeconomic policies and periods of capital outflow linked to contractionary policies.
Fiscal policy is a popular topic choice for empirical studies The economic cyclicality of fiscal policy is widely accepted in developing nations Stein et al
(1999) discovered a correlation coefficient of 0.52 between public consumption and economic growth in 26 Latin American nations from 1970 to 1995 Talvi and Carlos Vegh (2005) found that public consumption is cyclical across 36 developing
A study involving 32 nations from Asia, Africa, the Middle East, and Latin America revealed a correlation coefficient of 0.53, indicating significant relationships in fiscal policy trends Research by Kaminsky et al (2004) examined the fiscal policies of developing nations, finding that a sample of 83 low- and middle-income countries exhibited procyclical fiscal policies These findings align with the results presented by Akitoby et al (2004), further confirming the procyclical nature of fiscal policy in these regions.
The fiscal policy in developing nations and emerging economies often follows a pro-cyclical trend, primarily driven by institutional weaknesses, social friction, and declining creditworthiness in international markets (Alesina and Tabellini, 2008) Key research indicates that corruption and the state of democracy significantly influence fiscal cyclicality in these countries Additionally, while net external debt and social inequality, as indicated by the GINI index, show some impact, they generally hover around the 10% significance level Ultimately, institutional challenges emerge as the main contributor to pro-cyclical fiscal policies (Halland and Bleaney, 2011).
The interplay between the economic cycle and fiscal policy has been extensively studied, especially regarding the differences between developed and developing countries Key factors influencing this relationship include: i) limitations in accessing local and international credit markets (Caballero and Krishnamurthy, 2004; Gavin and Perotti, 1997; Calderón and Schmidt-Hebbel, 2008), ii) variations in political structures and organizations (Lane, 2003; Talvi and Végh, 2005; Alesina et al., 2008), and iii) the impact of wealth disparity and polarization (Woo, 2008).
Alessia and Tabellini (2008) investigated the link between corruption, political dynamics, and fiscal policy across 83 countries, including both OECD and non-member nations, from 1960 to 2003 Their findings indicate that democracies with elevated corruption levels tend to adopt more pro-cyclical fiscal policies They argue that when a corrupt government experiences a significant rise in national income, voters are likely to demand increased public goods and tax reductions, leading to a pro-cyclical bias in fiscal policy This behavior is driven by voters' concerns over the potential misuse of national resources for political advantage.
Research reveals that economies plagued by high levels of corruption often exhibit procyclical fiscal policies, where voters, unable to verify government income, assume budget surpluses are being embezzled and pressure the government to increase spending in favorable times This pressure leads governments to spend in accordance with the business cycle, even resorting to borrowing, resulting in fiscal policies that exacerbate economic fluctuations Empirical findings support the notion that corruption-ridden countries are more likely to adopt procyclical fiscal policies, particularly in democracies where high levels of corruption coincide with high voter accountability The combination of democracy and corruption is found to be a potent catalyst for procyclical fiscal policy, as democratic pressures on government expenditure often prioritize short-term gains over long-term sustainability.
The procyclical nature of fiscal policy in developing countries is largely attributed to credit constraints that hinder borrowing during economic downturns, leading to contractionary fiscal measures when growth weakens This theory, initially proposed by Gavin and Perotti in 1997, highlights that developing nations struggle to smooth out the business cycle due to limited access to international credit markets Their research indicates that fiscal cyclicality in Latin America is particularly pronounced during downturns, with the IMF's emergency finance becoming more accessible during these times They argue that high initial fiscal deficits contribute to this procyclicality, as investors tend to restrict financing to countries perceived to have unsustainable fiscal situations.
External loans are crucial for financing company expenses and play a significant role in an economy's recovery from recession by promoting long-term growth through increased productivity and project development Suzuki (2015) highlights that inefficiencies in the credit market lead to pro-cyclical fiscal policies, while political economy factors also contribute to this cyclical behavior According to Kaminsky et al (2004), developing nations often adopt cyclical fiscal strategies, in contrast to industrialized countries that implement anticyclical models, primarily due to the inadequacies of international credit markets During economic downturns, flaws in these markets restrict capital supply, leaving governments with cyclical fiscal policy as their only means to stimulate economic activity This aligns with the observation that when countries lose access to global financial markets, capital inflows to developing economies abruptly cease, resulting in significant declines in real prices, failed investments, and the implementation of fiscal austerity measures.
Calderón and Schmidt-Hebbel (2008) found that a country's financial openness, measured by the ratio of external debt to GDP, enhances access to domestic and international capital markets, facilitating fiscal policies that can counteract economic cycles However, Aghion and Marinescu (2008) argue that cyclical fiscal policies may hinder long-term economic growth, especially in countries with low financial intermediation, which also exposes them to vulnerabilities (Stoian et al., 2018) Additionally, research by Riascos and Végh (2003) and Caballero and Krishnamurthy highlights the complexities of these economic dynamics.
Inadequate financial depth, characterized by low domestic loans to the private sector and a lack of diversity in financial asset classes, hinders effective fiscal policy implementation during business cycles, particularly in developing nations The insufficient capital supply from both private and government sectors results in a reliance on cyclical fiscal policies, leading to inadequate capital injections during economic downturns Consequently, delayed fiscal adjustments prevent governments from making necessary investments during periods of economic growth, highlighting that credit market deficiencies at the national level significantly impact the business cycle.
Abbott and Jones (2013) explore the cyclicality of public expenditures as a reflection of OECD fiscal policy, highlighting that the responsiveness of public spending to economic cycles is influenced by political polarization and government debt limits They find that sub-central government expenditures and inter-government transfers tend to be more cyclical than central government spending due to political power dynamics Stoian et al (2018) assess fiscal risk in 28 EU countries from 1990 to 2013, identifying the Czech Republic, Greece, France, Italy, Malta, Portugal, and the UK as the most financially vulnerable Eyraud et al (2017) analyze fiscal procyclicality and budgetary issues in 19 euro area nations over 16 years Lewis (2009) uses time series analysis to examine the fiscal policies of Central and Eastern European countries, revealing that their budget balances are less stable than those in Western Europe and that EU membership has led to financial losses since 1999.
Research indicates that political factors significantly influence the procyclicality of fiscal policy Talvi and Vegh (2005) highlight that emerging nations often adopt cyclical fiscal policies due to policy distortions Their analysis shows that tax reduction measures can harm developing countries' efforts to achieve budget surpluses, as their tax bases are highly volatile Therefore, governments should implement fiscal policies that counteract the business cycle The fluctuations in fiscal income, driven by political dynamics, lead to cyclical fiscal policies The authors note that political pressure to utilize budget surpluses increases as the surplus grows, particularly during periods of volatility characterized by substantial tax base variations, which is common in developing countries.
LITERATURE REVIEW BETWEEN PUBLIC DEBT AND ECONOMIC
Numerous empirical studies have examined the impact of public debt on economic growth, yielding mixed results While some research suggests that public debt hinders economic growth, other studies indicate that it can actually stimulate growth.
2.4.1 Literature review of the negative impact of public debt on economic growth
Numerous studies, including those by Reinhart and Rogoff (2010, 2012), Mohd et al (2013), and Choong et al (2010), have established a clear link between government debt and economic growth Specifically, external debt has been shown to have a detrimental effect on economic growth, as evidenced by research from Reinhart and Rogoff, Chong et al., and Mohd et al Furthermore, empirical studies, such as Diamond (1965), indicate that government debt can limit individuals' access to savings and capital reserves Additional insights from Adam and Bevan (2005), Saint-Paul (1992), and Aizenman et al (2007) further support the notion that high levels of government debt may hinder economic development.
Numerous studies have identified a negative correlation between government debt and economic growth, including research by Gómez-Puig and Sosvilla-Rivero (2015; 2017), Ahlborn and Schweickert (2016), Panizza and Presbitero (2013), Szabo (2013), Égert (2012), Afonso and Jalles (2011), Cochrane (2011a, 2011b), Kumar and Woo (2010), the International Monetary Fund (2005), and Clements et al (2003).
Between 1961 and 2013, Gómez-Puig and Sosvilla-Rivero (2017) examined the long-term effects of public debt on GDP growth rates in EU countries Utilizing an autoregressive distributed lag (ARDL) model with annual data, their study found that public debt adversely affects the long-term GDP growth rates of euro area member states.
Ahlborn and Schweickert (2016) analyzed the relationship between public debt and GDP growth across 111 OECD and developing countries over eight five-year periods from 1970 to 2010 Their findings indicate that the impact of public debt on GDP growth varies significantly by country, largely due to the fiscal efficiency of each economic system Utilizing various statistical methods, including time-fixed effects and ordinary least squares (OLS), the study revealed that public debt negatively affects GDP growth rates.
Research indicates that debt significantly hampers economic growth in Bangladesh, with external debt servicing reducing GDP growth by 1.3% (Yeasmin & Chowdhury, 2014) Clements et al (2003) suggest that a substantial decrease in foreign debt could enhance per capita income growth by approximately 1 percentage point annually in highly indebted poor countries (HIPCs) Similarly, Babu et al (2014) found that external debt adversely affects GDP per capita growth within the East African Community (EAC), while Malik et al (2010) predicted a decline in economic growth with rising external debt Additionally, Panizza and Presbitero (2013) utilized the instrumental variable technique to analyze the impact of public debt on real GDP per capita growth across OECD countries, revealing consistent trends across the economies studied.
Presbitero (2013) find a negative association between the public debt-to-GDP ratio and real per capita GDP growth
Szabo (2013) analyzed the relationship between public debt to GDP ratio and GDP growth across 27 EU countries from 2008 to 2014 His linear regression model revealed that public debt negatively affects GDP growth in the short term, with growth being particularly sensitive to fluctuations in public debt levels However, in the long run, the impact of public debt on GDP growth is minimal.
Research indicates a negative correlation between debt levels and economic growth A study from 2013 revealed that a 1% rise in the debt-to-GDP ratio leads to a 0.027% reduction in annual GDP growth Similarly, Égert (2012) identified a significant negative relationship between public debt and GDP growth across 20 industrialized nations from 1946 to 2009, using a standard linear model with various thresholds Additionally, Afonso and Jalles (2011) analyzed the effects of government debt on GDP per capita growth and productivity in 155 countries from 1970 to 2008, employing synthetic time series and OLS cross time series methods, and found a statistically significant negative impact of government debt on GDP per capita growth in all examined economies.
Reinhart and Rogoff (2010) analyzed sustainable economic growth and its relationship with government debt, using data from 44 countries over 40 years (1970-2009) They found that when government debt is less than 90% of GDP, the link to economic growth is weak However, increasing government spending exacerbates the government debt issue While high spending can promote long-term economic growth, it also leads to budget deficits as consumption outpaces income To cover these deficits, governments often resort to borrowing from domestic or international sources Although this may temporarily improve financial conditions, it remains vulnerable to shifts in the economic landscape and fluctuating levels of government debt.
The mid-1970s oil crisis significantly impacted the balance of payments, leaving indebted countries struggling with substantial debt, which hampers economic development Emerging economies face challenges in sustaining growth and completing development projects Governments often resort to short-term borrowing while investing heavily in long-term initiatives, making it challenging to generate the revenues needed to fulfill their debt obligations.
A study by Shkolnyk et al (2018) highlights that in a selection of emerging countries, including Armenia, Azerbaijan, Belarus, Kazakhstan, and Moldova, external debt significantly hinders economic growth, with this effect being statistically significant at the 5% confidence level.
Excessive external debt can hinder economic growth by limiting investment opportunities and complicating government policy measures like fiscal adjustments and trade liberalization This reluctance to implement necessary policies creates an unfavorable macroeconomic environment, negatively affecting both the quantity and efficiency of investments Investors may lean towards short-term projects due to uncertainty about the debtor's repayment ability, which can reduce overall investment returns and stifle economic growth A study by Kharusi and Ada (2018) found a statistically significant negative relationship between Oman's external debt and its economic development from 1990 to 2015.
Siddique et al (2016) employ an automatic distribution delay (ARDL) model, incorporating control variables such as trade, population, and capital formation, to analyze the impact of public debt as a ratio to GDP on growth in 40 indebted countries from 1970 to 2007 Their findings reveal that the debt variable negatively and significantly affects GDP in both the short and long term, aligning with previous expectations The authors also highlight that rising levels of debt contribute to this detrimental effect.
47 detrimental effect on economic growth in indebted nations, as a significant portion of their output is spent to repay foreign lending institutions; this discourages investment
Snieka and Burksaitiene (2018) analyze how changes in real public debt, real private debt, and deflationary housing prices influence GDP across 24 European Union nations, employing least squares regression (OLS) and autoregression (AR) with panel data The study excludes smaller euro area countries due to the volatility of their financial services, which can distort economic fluctuations Their findings reveal a significant negative impact of public debt growth on the economy, observable with lags of zero, one, or two years.
Lim (2019) examines the relationship between debt and growth when total private and state debt is considered The sample consists of 41 nations from 1952 to
2016 The research makes use of a vector autoregression (VAR) model Lim discovered a negative correlation between the rate of overall debt increase and the rate of economic growth
Abubakar and Suleiman (2020) developed an analytical model to assess the impact of public debt on economic growth across 37 OECD countries, employing two-stage least squares regression Unlike prior studies, this research examines both the long-term and short-term effects of public debt The results reveal that public debt has a significant permanent and temporary positive influence on economic growth; however, the negative permanent impact of debt outweighs the temporary benefits Furthermore, while not all groups of nations experience temporary positive effects, every group faces lasting negative consequences.
THE BASIS OF DESIGNING EMPIRICAL RESEARCH MODEL
Many emerging nations often adopt pro-cyclical fiscal policies, which can be detrimental to their economies During recessions, governments tend to cut spending and raise taxes, leading to reduced private consumption and investment, further exacerbating economic downturns Conversely, in times of economic growth, increased government spending and tax cuts can cause the economy to overheat, creating an overly optimistic environment fueled by heightened aggregate demand This cyclical approach to fiscal policy is viewed as ineffective for both developed and developing countries.
66 is a lot of evidence that emerging countries use cyclical fiscal policy, even though its implementation is not desirable
Previous studies have explored the reasons behind the cyclical fiscal policies adopted by developing economies, highlighting two main explanations The first explanation points to inefficiencies and limitations in international credit markets, as evidenced by research from Gavin and Perotti (1997) and others, which indicate that the underdeveloped nature of credit markets in these nations leads to cyclical fiscal responses during economic downturns For instance, Latin American countries exhibit a reliance on a narrow range of credit options during crises, with IMF loan usage significantly increasing in such periods Additionally, Alberola et al (2006) emphasize that the financial vulnerability of Latin America stems not only from high public debt levels but also from fluctuations in financial conditions impacting institutional performance The second explanation focuses on political factors, including regime distortions, the quality of political institutions, and political polarization, which contribute to the procyclical nature of public spending, as discussed by Calderón and Hebbel (2008) Further studies investigate the interplay between social inequality, key structural characteristics of countries, and the imperfections in credit markets in relation to fiscal policy cycles.
A study conducted in 1997 reveals a significant relationship between political factors and social inequality with cyclical government expenditures across various EU countries This correlation is evident in both cross-country regression analyses and tabular data.
Previous research has predominantly focused on government spending as an indicator of fiscal policy, while the role of government revenue has often been overlooked due to limited data on tax rates and revenue in developing countries Despite this gap, various studies and theories have explored the cyclicality of fiscal policy in emerging nations, highlighting the need for a more balanced understanding of both spending and revenue dynamics According to Talvi and Végh, these factors are crucial for assessing fiscal policy effectiveness in these economies.
(2005), regression is the most effective tool for measuring the fiscal policy reaction
To analyze the business cycle, it is essential to define the dependent variable, typically linked to fiscal policy outcomes such as government spending or fiscal balance Commonly used variables in this context include the evolution of GDP, which can be represented in various forms, including logarithmic values or growth rates, to effectively measure fluctuations in the business cycle.
Monitoring tax collections is essential for accurately assessing the cyclical aspects of countries' fiscal strategies However, long-term inconsistencies in tax-related variables can complicate this analysis Additionally, factors such as tax evasion, the shadow economy, electoral impacts, and government regulation of tax collection can significantly influence tax revenues Despite certain definable aspects, the reliability of data from the examined countries remains questionable.
This study examines the budget deficit-related theory, which posits that public debt can hinder economic growth An increase in the budget deficit leads the government to compete with private borrowers for capital, driving up interest rates Higher interest rates can deter private sector investments in machinery and equipment, ultimately reducing available operating capital and future growth rates Additionally, rising debt levels may raise concerns among investors about a country's ability to repay its creditors, necessitating higher returns to attract continued financing This scenario can trigger sudden interest rate spikes, destabilizing the financial sector and negatively impacting economic growth Historical evidence shows that financial crises stemming from excessive debt have imposed significant economic costs on various nations (Reinhart and Rogoff, 2010).
The growth-optimizing public debt threshold theory, proposed by Sachs (1989) and Krugman (1988), is based on the debt balancing hypothesis Krugman argues that when public debt remains below a specific threshold, the positive effects of government concentration will surpass the investment effects, leading to increased economic growth as public debt rises.
(1988) states that economic growth can only occur when an increase in efficient public spending substitutes a decline in private spending However, Krugman
Public debt can negatively impact economic growth once it surpasses a certain threshold, as highlighted by 1988, who argues that the crowding out effect occurs when government borrowing for fiscal deficits reduces private sector capital availability, ultimately diminishing national investment Similarly, Sachs (1989) posits that while lower public debt levels can enhance economic growth, excessive government debt leads to increased economic instability due to anticipated future tax increases This prolonged economic uncertainty hampers investment and consumption, decreases employment, and slows output growth due to the crowding effect.
Research on the effects of excessive public debt remains inconclusive, highlighting the need for further investigation into its diverse impacts on economic growth across different countries Existing studies suggest a nonlinear, concave relationship between public sector debt and economic growth, indicating an inverted U-shaped connection where exceeding a certain debt threshold can lead to negative growth effects While these threshold values do not specify a target for growth projections, they provide substantial evidence of the complex relationship between public debt and economic development Additionally, instability in debt dynamics may increase the risk of adverse effects on capital accumulation and productivity, further hindering economic growth.
69 understanding of the problem of excessive public debt and its impact on economic activity
Numerous empirical studies have explored the relationship between governmental debt and economic growth, yet findings regarding the asymmetric effects and public debt thresholds remain inconsistent Most research suggests that public debt below a certain threshold positively influences economic growth (Reinhart and Rogoff, 2010; Baum et al., 2013; Woo and Kumar, 2015; Taylor et al., 2012; Irons and Bivens, 2010; Pescatori et al., 2014; Rankin and Roffia, 2003; Mencinger et al., 2015; Bexheti et al., 2020) However, there is a lack of studies examining the nonlinear impacts of public debt on economic growth in developing countries (Mencinger et al., 2015; Checherita and Rother, 2010; Bexheti et al., 2020) Emerging nations face unique challenges such as war, political instability, hyperinflation, and financial crises, making them intriguing subjects for studying the public debt-economic growth relationship This research aims to investigate the effect of Vietnam's public debt on its economic growth and proposes four hypotheses to analyze this relationship.
H1: Fiscal policy has a causal impact on the economic cycle in Vietnam H2: Vietnam's fiscal policy responds positively to the economic cycle
H3: The public debt hypothesis does not have a linear influence on economic growth, but public debt has a asymmetric effect on economic growth in Vietnam
The hypothesis suggests that reducing public debt by a certain amount positively influences economic growth in Vietnam, while increasing public debt by the same amount negatively impacts economic growth.
To examine the asymmetric relationship between Vietnam's public debt and economic growth, we employ NARDL econometric models and methodologies
This study is grounded in several research findings that investigate the nonlinear relationship between public debt and economic growth in transition countries (Mencinger et al., 2015; Checherita and Rother, 2010; Bexheti et al., 2020).
RESEARCH METHODOLOGY
RESEARCH MODEL
A downgrade regression is a multivariable regression in which the coefficient matrices are subject to constrained conditions Johansen estimated the models ∆Y t and Yt-1 depending on the ∆Y t-1 , ∆Y t-2 , , ∆Y t-p+1 :
Y = ∆Z*E +u 1 Estimating the matrices D and E by OLS : D=(D1, D2,…, Dp-1) = ∆Y∆Z'(∆Z∆Z') -1 E=(E1, E2,…, Ep-1) = Y∆Z'(∆Z∆Z') -1 The residuals R0 and R1 of the equation (4.1.3.12) and (4.1.3.13):
R0t and R1t are the residuals at t:
The VAR model that is derived (4.1.3.6) is reduced to the model :
Assuming u has a normal distribution, then the rational function of this model depends only on 𝑅 0𝑡 and 𝑅 1𝑡
2𝐿𝑛(|(𝑅 0 + 𝑅 1 (αβ')')'(𝑅 0 + 𝑅 1 (αβ')')|) where k includes all constants after function constraint
We find the maximum of this CLF The solution is not unique because for each α, β' and any non-degenerate G matrix, we have: ∏ = αβ'= αGG -1 β'= α ∗ β'*, with α ∗ αG; β'*= 𝐺 −1 β' is a solution approach
If the matrix Π = αβ' has no constraints, then the maximum is Π = 𝑆 01 𝑆 11 −1
To address the association condition where r(Π) = r, it is essential to determine the solution corresponding to the levels of the α and β' matrices This solution can be obtained by solving the associated eigenvalue problem.
Solving the above system of equations will give m eigenvalues 𝜆 𝑖 and m eigenvectors 𝜔 𝑖
Sort 𝜆 𝑖 in descending order and select the r eigenvectors corresponding to the r biggest of 𝜆 𝑖 values
Then, the highest plausible estimate of the matrix 𝛽 is provided by the formula:
And the estimation of the matrix 𝛼 is: 𝛼̂ = 𝑆 00 𝐶̂
Logarithmic Maximum Value of CLF function
Eigenvalues indicate the canonical correlation between Yt and Yt-1, highlighting the strongest correlation among their linear combinations These co-integration relationships can be understood as linear combinations of Yt-1 that exhibit the highest correlation with linear combinations of ∆Yt under stable conditions.
The VECM model features the form: yt -yt-1 = (A1+ A2+…+Ap - I) yt-1 - (A2+…+Ap) (yt-1-yt-2) - (A3+…+Ap) (yt-2- yt-3)-…- Ap (yt-p+1 -yt-p) + ut Δ yt = Π yt-1 + C1 Δ yt-1 + C2 Δ yt-2+…+ Cp-1 Δ yt-p+1+ ut
The model containing the term Π yt-1 is the error correction part of ECM
If yt has k cointegration relations, then Π has the form: Π = α x β
Then: Δ yt = αβ yt-1 + C1 Δ yt-1 + C2 Δ yt-2+…+ Cp-1 Δ yt-p+1+ ut
The equation ECt-1 = β yt-1 indicates a relationship where non-stationary sequence combinations in yt are transformed into a stationary sequence In this context, ECt-1 reflects the residuals from these combinations, signifying the state of imbalance at time t-1 Additionally, the parameter α serves as the adjustment coefficient for Δ yt, responding to any arising imbalances.
After performing tests, especially the stationarity test for time series, the regression model will be assessed and selected It is essential to transform non-stationary time series into stationary ones by applying higher-order differencing.
The Unit root test, conducted at a significance level of α = 0.05%, reveals that all series reject the null hypothesis of a unit root, indicating that the data series are stationary with the same order of difference.
When k = 0 (None), p -value =0.0000 < α should reject the hypothesis Ho: r
= 0 (no cointegration between variables), however when k = 1 (At most 1), p –value
> α should accept the hypothesis Ho: r = 1 The series have cointergration with each other
To identify the optimal delay for a model, criteria such as LR, FPE, AIC, and HQ are utilized, alongside the PACF chart from the BOX-JENKINS approach Various information criteria exist for determining model lag, and Johansen (1990) found that the VECM lag is one order smaller than that of the VAR Accordingly, the authors establish their hypothesized lag in this analysis.
To evaluate the stability of the VECM model, conduct the AR Root Test to determine if all eigenvalues are less than 1 and lie within the unit circle A positive outcome indicates that the VECM model is stable.
The tests indicate that the stationary series exhibit the same order of difference, and the cointegration test confirms a single cointegration, validating the choice of the VECM model The VECM model remains stable and suitable for regression when the correct lag length is applied Consequently, the author presents findings derived from variance decomposition analysis and impulse response functions.
To assess the stationarity of the time series, a unit root test was conducted, revealing that the data series are stationary at the same level of association: I(1) Consequently, the Engle-Granger or Johansen tests can be utilized to examine cointegration among the series The author applies the VECM method, following Johansen's 1990 study, to test for cointegration when the stationary series share the same order of difference Johansen's statistical tests identify the number of linked vectors and assess cointegration, confirming that the data series are indeed cointegrated As a result, the VECM regression model is selected for further analysis.
To determine the appropriate Vector Error Correction Model (VECM) and prevent spurious regression issues, it is essential to ensure that the data series are 75 and cointegrated Additionally, the presence of stationary variables with the same order of difference that are cointegrated indicates the necessity for a regressive VECM model, as highlighted by Granger et al (1987).
The VECM model treats all variables equally, allowing for a comprehensive analysis of their mutual impacts without distinguishing between endogenous and exogenous factors This capability enables the model to assess both short- and long-term causal relationships effectively Additionally, the VECM is suitable for short time series data, making it particularly relevant for analyzing data from Vietnam.
In regression analysis of time series data, a model that incorporates both present and lagged values of variables is referred to as a lagged distribution model When the model's explanatory variables include one or more lagged values of the dependent variable, it is specifically termed an autoregressive model.
The NARDL regression model will be chosen following a series of tests, particularly focusing on the stationarity of the time series data If the time series is found to be non-stationary, it will be transformed into a stationary series by applying higher-order differencing.
NARDL (Non-linear Auto Regressive Distributed Lag) is a statistical model that allows for the assessment of the varying impacts of independent variables on a dependent variable The model is represented by the equation dYt = m + α1 dYt−1 + α2 dYt−2 + … + αn dYt−n + β0 dXt + β1 dXt−1 + … + βn dXt−n + β2 nX t−1 + ut, which captures both short-term and long-term relationships among variables, making it a powerful tool for economic analysis.
Whereas dYt and dXt are the stationary variables after the difference, and ut is the white noise residuals dYt−n and dXt−n are stationary variables at lags
NARDL is used in regression analysis involving time series data:
Xt= A 1 X 𝑡−1 +…+A 𝑞 X 𝑡−𝑞 +ɛ 𝑡 u 𝑡 ɛ 𝑡 are white noises with stationary covariance matrix
Y is regressed against the lagged values of Y itself and other X variables
The NARDL model plays a vital role in financial econometrics, particularly in analyzing the impact of Vietnam's public debt on its economic growth This study aims to explore this relationship using a dynamic regression model that incorporates asymmetrical distributed lags.
GDP = f(IRB, USD/VND00, LIA, BMG)
VARIABLES DESCRIPTIONS OF THE RESEARCH MODEL
3.2.1 The variables of the model of the relationship between fiscal policy and the business cycle
This study offers a new insight into how Vietnam's fiscal policy adapts to the economic cycle, particularly regarding public spending Utilizing a research model that incorporates variables reflective of the economic cycle and fiscal policy, the thesis is grounded in the framework established by Talvi and Végh (2005).
Table 3.1 Sources of variables used in the model
Variables Symbol Ratios/ Calculation method
Vietnam production GDP GDP index (%) IMF
LNEXP EXP index, logarithm IMF
LNTAX TAX index, logarithm IMF
Public debts LNLIA LIA index, logarithm IMF
According to the research of Debrun and Kapoor (2011), Furceri and Jalles
(2016), and Afonso and Jalles (2013), the size of government spending is frequently regarded as the most significant factor in determining fiscal policy stability Keynes
In 1936, it was posited that the economic cycle is driven by variations in economic growth, characterized by periods of recession marked by peaks and troughs This analysis utilized key variables such as GDP, which indicates the business cycle, and government spending, which serves as a representation of fiscal policy.
3.2.2 The variables of the model of public debt on economic growth
The study examines five key variables: economic growth (represented by GDP), government spending, lending interest rates, the USD/VND exchange rate, and government debt It highlights the relationship between public debt and economic growth, utilizing control variables such as government expenditures and interest rates These variables align with established theories and previous research, emphasizing their relevance in analyzing the impact of public debt on economic growth.
Table 3.2 Description of the model variables
GDP Economic growth % Dependent variable
LIA Public debt Logarit Asymmetric variable EXP Government Expenditures Logarit Control variable
IRB Lending rate % Control variable
USD/VND00 USD/VND exchange rate Logarit Control variable
The following particular model has been created:
RESEARCH DATA
3.3.1 Research data of the model of the relationship between fiscal policy and the business cycle Table 3.3 Descriptive statistics of the variables
Source: Author’s summary and calculation
The data analyzed spans from 2000 to 2021, focusing on Vietnam's GDP, which is sourced from the IMF's international financial data Key variables such as government spending, tax revenue, and debt are also obtained from IMF statistics These variables exhibit a non-normal distribution, necessitating a transformation to their natural logarithmic form to achieve a standard distribution suitable for model input Additionally, annual frequency variables are often influenced by seasonal factors; therefore, this study employs the Census X12 tool to effectively isolate seasonal impacts from the data series.
3.3.2 Research data of the model of public debt on economic growth
Table 3.4 presents the descriptive statistics for the study's variables, which include GDP, EXP, IRB, LIA, and USD/VND00 Among these, GDP, IRB, and USD/VND00 exhibit a normal distribution, whereas EXP demonstrates a significant standard deviation, a high mean, and a pronounced skewness as indicated by the Jarque-Bera index.
Table 3.4 Descriptive statistics of variables
IRB GDP LIA USDVND EXP
Source: Regression result from Eviews10
The IMF financial statistics (IFS) quarterly data from Q1 2000 to Q1 2021 are utilized to analyze the nonlinear impact of public debt on Vietnam's economic growth This study examines the relationship between Vietnam's gross domestic product (GDP) and the lending rate (IRB), both expressed as percentages, to gain insights into the dynamics of economic performance in relation to government debt levels.
83 debt (LIA), government spending (EXP), and USD/VND00 are non-normally distributed propensity variables, thus they must be transformed to logarithmic form
RESEARCH RESULTS AND DISCUSSION
EXAMINING THE RELATIONSHIP BETWEEN FISCAL POLICY AND
AND THE BUSINESS CYCLE 4.1.1 Tests of the research model
4.1.1.1 Stationary Test for data series
When analyzing time series data, credibility hinges on the use of stationary data series A time series \( Y_t \) is deemed stationary if it meets three criteria: its mean and variance remain constant over time, and the covariance between \( Y_t \) and \( Y_{t-s} \) relies solely on the distance \( s \) between the two time points, rather than the specific time \( t \) Failure to use stationary time series can lead to inaccurate regression results.
To test whether Yt is stationary that means check whether Yt is a random walk:
At a significance level α, if the null hypothesis (Ho) is accepted, it indicates that the time series is non-stationary; conversely, rejection of Ho suggests the series is stationary The Dickey-Fuller unit root test was performed to assess the stationarity of the LNEXP and GDP time series The findings reveal that the series does not stabilize at d = 0.
Table 4.1 Unit root test of data series (d=0)
Augmented Dickey-Fuller test statistic Prob.*
Null Hypothesis: LIA has a unit root 0.5113
Null Hypothesis: EXP has a unit root 0.1692
Null Hypothesis: TAX has a unit root 0.1145
Null Hypothesis: GDP has a unit root 0.0529
The test results reveal that, at a significance level of α = 0.05, we accept the null hypothesis (Ho) of a unit root presence Consequently, the series for EXP, TAX, LIA, and GDP do not achieve stationarity at the difference d = 0.
Table 4.2 Unit root test of data series (d=2)
Augmented Dickey-Fuller test statistic Prob.*
Null Hypothesis: LIA has a unit root 0.0000
Null Hypothesis: EXP has a unit root 0.0000
Null Hypothesis: TAX has a unit root 0.0000
Null Hypothesis: GDP has a unit root 0.0000
Most economic time series are non-stationary but can be transformed into stationary series through differencing A non-stationary series that becomes stationary after differencing d times is termed a connected series of order d, denoted as Yt ͌ I (d) The Dickey–Fuller unit root test is utilized to assess the stationarity of the LNEXP and GDP series at a differencing order of d=2.
At a significance level of α = 0.05, the unit root test results indicate that the null hypothesis of unit roots is not supported for the series EXP, TAX, LIA, and GDP, which are stationary at the second difference level As these data series exhibit the same order of differencing, a cointegration test will proceed.
The Johansen test is conducted to determine the cointegration among the stationary data series EXP, TAX, LIA, and GDP, all of which exhibit the same order of difference (d=2).
Table 4.3 Cointegration test of data series
Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Trace 0.05
No of CE(s) Eigenvalue Statistic Critical Value Prob.**
Trace test indicates 1 cointegrating eqn(s) at the 0.05 level
*denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-valuesUnrestricted Cointegrating
The Johansen test results indicate that the variables EXP, TAX, LIA, and GDP exhibit cointegration at a significance level of α = 0.05, with a p-value of 0.0194, which is less than α Therefore, we reject the null hypothesis Ho: r=0, confirming the presence of a cointegration relationship among these variables.
When the time series exhibit stationarity with the same order of difference (d=2) and Johansen's test indicates cointegration, the Vector Error Correction Model (VECM) is deemed suitable for analyzing the relationship between Vietnam's economic cycle and fiscal policy.
Granger's Wald Tests are essential for assessing the endogeneity or exogeneity of variables in a model, specifically determining if they should be included The analysis involves key variables such as EXP, TAX, LIA, and GDP to evaluate their significance in the model.
Null Hypothesis: Obs F-Statistic Prob
GDP does not Granger Cause EXP
EXP does not Granger Cause GDP
3.31170 0.0416 LIA does not Granger Cause EXP
EXP does not Granger Cause LIA
2.62721 0.0787 TAX does not Granger Cause EXP
EXP does not Granger Cause TAX
0.50411 0.6060 LIA does not Granger Cause GDP
GDP does not Granger Cause LIA
4.15017 0.0194 TAX does not Granger Cause GDP
GDP does not Granger Cause TAX
3.44239 0.0369 TAX does not Granger Cause LIA
LIA does not Granger Cause TAX
The regression analysis reveals that at a significance level of α = 0.05, EXP significantly influences GDP, GDP affects LIA, and TAX impacts GDP Additionally, at α = 0.1, LIA also shows a significant effect on GDP Therefore, all variables are endogenous and essential for inclusion in the model.
4.1.1.4 Stability Test in the research model
To assess the stability of the Vector Error Correction Model (VECM), the AR Root Test is employed, which evaluates whether the eigenvalues remain within the unit circle or do not exceed 1 A VECM model is deemed stable when these conditions are met.
The results show that the solutions are not larger than 1 or are not outside the unit circle, so the VECM model is stable, the model is suitable for regression:
Fugure 4.1 Stability test of the model
4.1.2 Results of testing the relationship between fiscal policy and economic growth
After conducting VECM model tests, VECM regression model results are obtained as follows: u = GDP - 0.095912EXP + 1.881209LIA + 26.02291TAX+ 3.100242 GDP = -3.100242 + 0.095912EXP - 1.881209LIA - 26.02291TAX+ u
In the long run, the volatility of GDP is positively related to the volatility of EXP and inversely with the volatility of LIA and TAX
Combination of non-stationary sequences into a stationary sequence, and ECt-1 is the residual in that combination ECt-1 = α indicates an imbalance in the t-
1 period, α is the adjustment coefficient when an imbalance occurs in the short run
The coefficient ECt-1 = -0.910403 indicates that a 1-unit imbalance from the previous period leads to a 91% adjustment of the dependent variable back to equilibrium in the first period Consequently, it requires over two periods to fully restore equilibrium.
This article examines the causal relationship between fiscal policy and the business cycle by constructing variance decomposition functions and impulse response functions These analytical tools help in understanding both the direct and indirect effects of shocks in one factor on another, providing a clearer insight into their interactions.
90 dynamic connection The author use the Cholesky factor coefficient recommended by Sims (1980) to determine the system's shocks
Figure 4.2 The Impulse Response function of EXP, TAX, LIA, GDP
Government spending volatility shocks lead to an initial positive impact on real GDP, especially noticeable in the first four periods This phenomenon can be attributed to Vietnam's status as a developing nation, where increased government capital infuses production and fosters economic growth However, once government spending exceeds production needs starting in the sixth period, the GDP response begins to fluctuate slightly over the long term.
The responsiveness of GDP to LIA shocks has shifted since the initial phase, indicating a reversal in trends Increased government borrowing tends to elevate interest rate volatility and may crowd out private sector investment Consequently, variations in government debt significantly impact economic growth.
Similarly, tax income is one of the indicators of the response of the economy to the state's fiscal policies Increasing tax income is not always conducive to economic growth
When economic development slows, government spending decreases, and the government increases both public debt and tax collections to cover the deficit
EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMIC
GROWTH 4.2.1 Tests of the research model
4.2.1.1 Stationary Test for Data series
To test whether Yt is stationary, Dickey – Fuller test is conducted:
At a significance level of α = 0.05, the acceptance of the null hypothesis (Ho) indicates that the time series is non-stationary, while its rejection suggests that the time series is stationary The Dickey-Fuller test was applied to the data series including EXP, GDP, IRB, USD/VND00, and LIA, yielding results that inform the stationarity of each series.
Table 4.7 Unit root test of data series (d=0) Augmented Dickey-Fuller test statitic t-Statistic Prob.*
Null Hypothesis: GDP has a unit root -2.874037 0.0529 Null Hypothesis: LNUSDVND00 has a unit root -1.026399 0.7404 Null Hypothesis: IRB has a unit root -1.748785 0.4032
Null Hypothesis: EXP has a unit root -2.317600 0.1692 Null Hypothesis: LIA has a unit root -1.534560 0.5113
The test results, with the significance level α = 0.05%, all accept the hypothesis Ho, thus the series GDP, IRB, USD/VND00, EXP and LIA all do not stop at difference d = 0
Continue to test the stationary of the series GDP, IRB, USD/VND00, EXP and LIA at the first difference:
Table 4.8 Unit root test of data series (d=1) Augmented Dickey-Fuller test statitic t-Statistic Prob.*
Null Hypothesis: GDP has a unit root -4.759976 0.0002 Null Hypothesis: LNUSDVND00 has a unit root -2.302451 0.0173 Null Hypothesis: IRB has a unit root -8.221248 0.0000
Null Hypothesis: EXP has a unit root -1.424586 0.0466 Null Hypothesis: LIA has a unit root -6.325325 0.0000
The test results with significance level α = 0.05%, all reject the hypothesis
Ho, so that the series GDP, IRB, USD/VND00, EXP and LIA stop at the first difference Thus, the data series are stopped at the first difference
Table 4.8 presents the results of the initial unit root test, revealing that the GDP, IRB, USD/VND00, EXP, and LIA series are stationary at the first difference, I(1) Conducting unit root tests is crucial for the NARDL model, as it requires stationary series at I(0) or I(1), or a combination of both The model is invalidated if any variable is found to be of second order, I(2), as this would compromise the F-statistic of the cointegration test (Ibrahim, 2015; Ouattara, 2004) The findings indicate that no series reaches the second order, enabling the continuation of this research with the NARDL model.
The results show that at the significance level α = 0.05, p -value = 0.0065 < α, so the hypothesis Ho is rejected The model has a suitable functional form for inclusion in the regression
Specification: GDP1 GDP1(-1) GDP1(-2) EXP1_POS EXP1_NEG EXP1_NEG(-
1) IRB1_POS IRB1_NEG IRB1_NEG(-1) LIA1_POS LIA1_NEG USDVND1_POS USDVND1_NEG C
Sum of Sq df Mean Squares
Source: Regression Results 4.2.1.3 The Breusch/Pagan Test
To test the Jarque-Bera test of the residuals and the test of variance, use the Breusch/Pagan test
Table 4.10 The Breusch/Pagan test
Heteroskedasticity Test: Breusch-Pagan-Godfrey
Obs*R-squared 24.91492 Prob Chi-Square(12) 0.0152
Scaled explained SS 48.44180 Prob Chi-Square(12) 0.0000
The results obtained from the Breusch/Pagan test show that at the significance level α = 0.05, p -value = 0.0084 < α should reject the hypothesis Ho The model is not subject to variance
Table 4.11 The NARDL mode Variables constant Std Err t-values P- values
GDP1(-1) 0.181591 0.112907 1.608325 0.1124 GDP1(-2) -0.406895 0.100292 -4.057119 0.0001 EXP1_POS -7.792198 1.478342 -5.270904 0.0000 EXP1_NEG -4.044499 0.943741 -4.285600 0.0001 EXP1_NEG(-1) -3.502798 1.351912 -2.590995 0.0117 IRB1_POS 0.040734 0.123100 0.330899 0.7417 IRB1_NEG 0.169743 0.084964 1.997836 0.0497 IRB1_NEG(-1) -0.194678 0.103401 -1.882748 0.0640 LIA1_POS 0.352669 1.051407 0.335425 0.7383 LIA1_NEG -0.557014 1.071044 -0.520066 0.6047 USDVND1_POS -9.718015 9.086940 -1.069449 0.2886 USDVND1_NEG -3.628589 8.181509 -0.443511 0.6588
Source: Regression Result from Eviews10
Before estimating the NARDL model, several preliminary tests were performed, including the Ramsey test for functional specification and the Breusch/Pagan variance test The findings, presented in Table 4.11, indicate that the NARDL model does not yield significant results.
97 contain any of the aforementioned flaws; hence, this study can be utilized to estimate NARDL
The F-statistic surpasses t_BDM in Table 4.12, indicating a significant long-term relationship between government debt and economic growth This finding allows for a deeper examination of the long-run connection when a nonlinear co-integration estimate is considered.
Table 4.12 Nonlinear co-integration test Co-integrated test statistics:
Source: Regression Result from Eviews10 4.2.1.5 Short-run and long-run asymmetry testing
The asymmetry test revealed a nonlinear impact of government debt on economic development, with WLR values of 2.034333 (p = 0.0138) and 16.74844 (p = 0.000) indicating that the influence of government debt on economic growth is statistically significant in both the short and long run.
Table 4.13 Short-run and long-run asymmetry testing Test Asymmetric relationship in the long run
Asymmetric relationship in the short run
Results Asymmetrical relationship Asymmetrical relationship
Source: Regression Result from Eviews10 4.2.1.6 The Wald Test
The Wald test is employed to evaluate the asymmetric impact of government debt on economic growth According to the findings presented in Table 4.14, the analysis at the equilibrium level C3C5, which has a probability value of 0.02062, reveals that government debt significantly influences economic growth in both the short and long term.
Table 4.14 Wald test in the short run and the long run
Source: Regression Result from Eviews10
4.2.2.1 Asymmetrical impact of public debt on economic growth in the long-run
The modeling results in Table 4.15 demonstrate that economic growth can stabilize to long-term equilibrium after short-term shocks to government debt Specifically, a one percent increase in government debt leads to a decrease of 0.209970 percent in economic growth, while a one percent decrease in government debt corresponds to an increase of 1.174791 percent in economic growth.
Table 4.15 Asymmetrical impact of public debt on economic growth in the long-run Value Coef Std Err t-Statistic P
0.136620 -9.143850 0.0000 EXP1_POS** -7.849069 1.487857 -5.275420 0.0000 EXP1_NEG(-1) -7.515130 1.512799 -4.967698 0.0000 IRB1_POS** 0.066491 0.130088 0.511122 0.6109 IRB1_NEG(-1) -0.032338 0.097176 -0.332774 0.7403 LIA1_POS** -0.209970 1.054558 0.199107 0.8428 LIA1_NEG** 1.174791 1.250243 -0.939650 0.3507 USDVND1_POS** -10.80028 14.13692 -0.763977 0.4475 USDVND1_NEG** 4.574194 9.746040 0.469339 0.6403 D(GDP1(-1)) 0.415322 0.100250 4.142873 0.0001 D(EXP1_NEG) -4.022579 0.960627 -4.187452 0.0001 D(IRB1_NEG) 0.140201 0.084974 1.649934 0.1036
Source: Regression Result from Eviews10
4.2.2.2 Accumulation of residuals in the NARDL model
Figure 4.3 Plot of cumulative sum (CUSUM) residuals
Source: Regression Result from Eviews10
Figure 4.4 Plot of adjusted cumulative sum (CUSUMSQ) residuals
Source: Regression Result from Eviews10
A stability test was performed on the predicted parameters using Cusum and Cusumsq to assess the statistical significance of the NARDL model The findings reveal that both Cusum and Cusumsq remain within the critical lines at a 5% significance level, confirming the model's stability and resilience against unexpected shocks or structural failures.
4.2.2.3 Asymmetric impact of changes in public debt on economic growth
Figure 4.5 Asymmetric cumulative dynamic multiplier graph of public debt and economic growth
Source: Regression Result from Eviews10
Figure 4.6 Asymmetric cumulative dynamic multiplier of USDVND exchange rate on economic growth
Source: Regression Result from Eviews10
The author conducts a cumulative dynamic multiplier analysis using the NARDL model to explore the asymmetric effects of government debt changes on both short- and long-term economic growth Figure 4.3 illustrates that economic growth reacts more swiftly and significantly to increases in government debt compared to decreases in the short term.
Growing government debt negatively impacts long-term economic growth, while reducing debt fosters positive growth effects This indicates that increased government debt can detrimentally influence economic performance The relationship between government debt and economic growth is characterized by an inverted U-shape, highlighting both short- and long-term asymmetric effects In emerging economies like Vietnam, budget deficits and escalating public debt remain common challenges, particularly during the early stages of economic development.
Substantial budgetary capital support is essential for economic stability; however, ineffective operational and management policies can lead to increased budget deficits, public debt, and economic pressure over time Rising government debt poses significant negative impacts on the economy, particularly in developing nations like Vietnam, where research by Kumar and Woo (2010) and Reinhart and Rogoff (2007) indicates an asymmetrical relationship between government debt and economic growth The statistically significant differences between periods of growth and decline highlight that government debt can have both short- and long-term detrimental effects on economic development.
Figure 4.5 demonstrates how favorable fluctuations in the USDVND exchange rate impact economic expansion In the short term, economic growth reacts more swiftly and noticeably to an increase in the exchange rate compared to a decrease However, in the long term, both rising and falling exchange rates positively influence economic growth, along with a neutral exchange rate This aligns with the State Bank of Vietnam's current exchange rate management strategy, which utilizes the exchange rate as a key tool to fulfill its monetary policy and economic growth goals.
Budget deficits and rising public debt are prevalent in rapidly growing economies like Vietnam, where significant capital assistance is essential for supporting the manufacturing sector during its early stages However, ineffective operational and management strategies can exacerbate budget deficits and public debt, putting additional pressure on the economy The detrimental effects of increasing government debt are particularly pronounced in this context, aligning with findings from previous empirical studies by Checherita-Westphal and Rother (2010), Kumar and Woo (2010), and Reinhart and Rogoff.
(2005), the current study's findings correspond to Checherita-Westphal and Rother
(2010), Kumar and Woo (2010) (2010b) Especially in developing nations such as Vietnam, the link between government debt and economic growth is asymmetrical
Vietnam's public debt management has successfully aligned with established goals, leading to significant improvements in the quality and efficiency of debt management strategies This progress is attributed to enhancements in the legislative framework, which now meets international standards However, challenges remain, including inherent risks in government debt and diminishing attractiveness of foreign borrowing due to rising costs The domestic capital market is underdeveloped, and non-bank financial institutions face numerous obstacles Additionally, the government struggles with the allocation of medium and long-term bonds at favorable rates, while investment capital, including concessional foreign loans, is growing slowly The rise in direct debt repayments from previous years is increasing the proportion of government expenditure dedicated to debt repayment relative to state budget income Lastly, a lack of maturity variation in government securities issuance poses further challenges to the government's fundraising capabilities.
This study investigates the relationship between public debt and economic growth in Vietnam, utilizing the NARDL regression model for empirical evaluation Findings reveal a nonlinear correlation, indicating that low levels of public debt positively influence economic growth, while rising public debt negatively affects it These results align with established theoretical frameworks and previous research Consequently, it is essential for the Government to foster a business-friendly environment to attract investment and bolster economic growth.
CONCLUSION AND POLICY IMPLICATIONS
CONCLUSION
The research indicates that during the analyzed period, developed countries typically employed countercyclical fiscal policies, while developing nations, including Vietnam, adhered to procyclical policies, aligning fiscal actions with the business cycle The study examined public spending, government debt, and tax revenues as factors influencing this cyclical nature of fiscal policy Findings reveal that government spending positively correlates with economic growth, while both government debt and tax revenue exhibit a negative correlation with economic growth.
The fiscal policy of developing nations, including Vietnam, aligns with the economic cycle, as supported by empirical research With a positive economic growth rate, Vietnam must enhance its production resources to maintain development momentum, emphasizing the importance of physical resources for economic expansion Unlike developed countries with surplus potential, Vietnam should focus on transitioning towards wealth accumulation.
During economic distress, developing nations face significant challenges in securing adequate financing due to credit constraints and complex credit markets Vietnam's already low credit rating is likely to worsen in times of crisis, limiting its access to credit Consequently, the government will need to implement strict fiscal policies and reduce spending to navigate these financial challenges.
In developing countries like Vietnam, government spending primarily focuses on salaries for employees and investment costs During economic recessions, governments face the challenge of cutting expenditures, often opting to reduce investments rather than wages due to external pressures Consequently, this trend highlights the critical relationship between long-term government spending and economic stability.
108 to economic expansion Without public projects, it is difficult for the government to sustainably raise taxes
During a recession, developing countries face a critical trade-off between reducing government investment and recurrent spending, which can hinder future economic growth It is essential for governments to exercise caution when implementing contractionary fiscal policies that involve cutting investment spending, as such decisions may have long-term negative effects on the economy.
Vietnam is an emerging economy that necessitates substantial capital for its ongoing expansion and development While the government implements an expansionary fiscal policy, prioritizing efficiency and targeted investment is crucial for fostering economic growth To maximize the impact of investments, it is essential for the government to avoid diluting resources by spreading investments too thinly.
Current research on the relationship between Vietnam's fiscal policy and economic cycle focuses primarily on qualitative analysis and situational evaluation
This study evaluates Vietnam's fiscal policy and economic cycle over recent years using a long-term quantitative model As economic and financial markets develop, the complexity of interactions between variables increases Therefore, policymakers must conduct extensive research utilizing historical data to gain new insights and achieve a more accurate understanding of the economic landscape Ultimately, this approach can guide the selection of the most effective fiscal policy mechanisms to foster the growth of the Vietnamese economy.
Vietnam's economy is still in the process of defining its market factors This study offers substantial empirical evidence indicating that research findings in Vietnam align with theoretical frameworks and previous empirical studies on procyclical fiscal policies in developing countries.
This study examines the impact of public debt on economic growth in Vietnam, revealing a disproportionate relationship between public sector debt levels and both short- and long-term economic growth outcomes.
Recent empirical studies reveal a nonlinear relationship between public debt and economic development in certain countries Utilizing the NARDL model, it is shown that public debt and annual GDP growth interact in a non-linear manner, with a critical threshold beyond which increased public sector debt negatively impacts developing economies such as Vietnam.
This empirical study of the Vietnamese economy reveals that public debt positively impacts economic growth at lower levels However, as public debt surpasses a certain threshold, its influence becomes increasingly detrimental These findings support hypothesis H1.
The research findings support hypothesis H2, which posits that higher public debt negatively affects economic growth It is evident that rising government debt hampers economic expansion, aligning with previous empirical studies focused on developing and emerging economies.
Research indicates a nonlinear relationship between public debt and economic growth, as shown by the NARDL regression model In Vietnam, low public debt positively influences economic growth, whereas increasing public debt negatively impacts it These findings support existing theoretical frameworks and prior studies To foster economic growth, the government should focus on creating a business-friendly environment to attract more investment.
POLICY IMPLICATIONS
Developing nations often lack automated stabilization instruments, with unemployment insurance being rare and transfers making up a minimal part of the budget Most government expenditures in these countries are directed towards recurring expenses and wages Additionally, indirect taxes, such as trade and consumption taxes, are more common than direct income taxes, which contribute little to the government budget due to low personal incomes As a result, fiscal policy in these nations tends to be highly procyclical.
During prosperous times, governments in developing nations tend to increase their investments and social benefits, while during recessions, they often cut back on spending Additionally, during periods of economic growth, it becomes challenging for these governments to decrease expenditures on essential sectors such as health, education, and infrastructure.
Fiscal policy in developing countries often tends to be procyclical due to several factors During times of high aggregate demand, government spending increases significantly, fueled by substantial capital inflows that elevate the exchange rate and enhance export performance This influx of investments leads to improved tax collection, as the government benefits from the wealth effect and the expansion of public projects As the economy expands, rising gasoline prices contribute to overall inflation, further increasing tax revenues Consequently, the government is incentivized to continue boosting spending, often driven by political pressures during periods of economic growth.
When capital exits an economy, it leads to a state of weakness and a sudden halt in growth In response to a significant drop in capital expenditures, governments are forced to reduce deficits by cutting spending This results in a decline in government spending (G), making fiscal policy procyclical In developing countries, government budgets primarily focus on civil servant wages and investment expenditures During a recession, political pressures often lead governments to cut investment rather than wages, as reducing investment is seen as a simpler solution, particularly in emerging economies.
Government investment in infrastructure, including roads and bridges, plays a crucial role in long-term economic growth These public initiatives are essential for sustainable tax revenue generation While investment cuts may sometimes be necessary, in developing countries, such reductions can paradoxically foster future economic expansion.
The disproportionate impact of public debt on economic growth highlights the necessity for improved economic management in Vietnam To alleviate the debt burden, enhancing resource utilization efficiency is crucial Policymakers must actively monitor public debt levels to mitigate the risk of accumulation Furthermore, effective management of government expenditures is essential to reduce public debt Research indicates that the money supply has an asymmetric effect on economic growth, suggesting that while it can stimulate growth, excessive money supply may impede it As a developing nation with a high average public debt, Vietnam must adopt fundamental economic principles, prioritizing minimal spending To prevent imposing a financial burden on future generations, authorities should develop a robust financial plan and reform fiscal and monetary policies to lessen reliance on public debt.
To stimulate economic growth and correct current account imbalances, developing countries are encouraged to seek loans from wealthier nations However, the burden of external debt can hinder economic development in these emerging economies When debt repayment costs are low compared to investment returns, it can foster increased investment and accelerate growth; conversely, high repayment costs can impede progress Vietnam utilizes both internal and external borrowing to bridge savings-investment gaps and address budget deficits, ultimately enhancing macroeconomic factors such as investment, consumption, education, and health.
Annual interest payments on public debt hinder economic growth, particularly as emerging nations shift from external to internal debt This transition has led to a growing concern over substantial domestic debt levels Delinquencies on internal loans can severely impact the economy, with interest rates on domestic debt often exceeding those of foreign debt, consuming a significant portion of government revenue and creating competition for financial resources.
112 and the private sector, resulting in private sector investment being crowded out This is a regular occurrence in developing nations such as Vietnam
The relationship between debt and economic growth in Vietnam reveals that excessive debt can hinder economic progress Pursuing higher public debt to stimulate growth is a misguided strategy, potentially leading to increased taxes, reduced private investment, and heightened consumer spending Data suggests that Vietnam's current debt levels negatively affect GDP growth, as its debt-to-GDP ratio exceeds the optimal threshold Countries with such elevated debt should prioritize reducing public debt to ensure adequate national revenue for repayment In cases of insolvency, raising tax rates to cover debt is not a sustainable solution.
This module educates governments in transitioning nations about the negative effects of public debt on economic growth, emphasizing the threshold at which debt becomes detrimental It cautions that aiming for higher debt levels to spur growth is not a viable policy Countries with debt surpassing their GDP must prioritize not only stabilizing but also reducing their public debt over the medium to long term Consequently, the most prudent approach for policymakers is to maintain public debt below GDP levels to effectively manage unpredictable external shocks that could adversely affect their economies.
Many countries are facing debt levels that exceed their GDP limits, necessitating immediate and bold measures to address fiscal challenges Prolonged high public debt complicates the implementation of policies aimed at future fiscal consolidation, as debt negatively impacts economic growth Therefore, it is crucial for nations to carefully design their fiscal policies, regularly evaluate their debt levels, and maintain a healthy debt-to-GDP ratio to ensure effective borrowing for public purposes Failure to manage debt effectively can hinder economic growth.
LIMITATIONS OF THE RESEARCH
The effectiveness of research outcomes is significantly influenced by the properties of the model used, which rely heavily on the factors included and the data collection stage Selecting Vietnam as a research country presents specific challenges, particularly due to the incomplete data on fiscal policy and economic growth prior to 2000, which restricts the model's observations and tests Additionally, the predominance of qualitative studies in the domestic landscape complicates the ability to conduct thorough and detailed comparisons of research findings with those from other studies.
The study has notable shortcomings, including a model definition that overlooks the potential influence of data outliers on the results Furthermore, while it examines the relationship between public debt, public sector spending, and economic growth, there is an opportunity to expand the research by exploring the mechanisms through which public debt indirectly affects growth.
Many developing nations face budget deficits due to excessive spending and insufficient revenue To address these deficits, governments can raise funds by printing money, borrowing domestically or internationally, or utilizing past budget surpluses When opting for borrowing over tax increases, governments incur public debt, which is classified into internal debt (owed to domestic lenders) and foreign debt (owed to international creditors) Since the 1980s, the rate of debt accumulation and repayment capacity have significantly influenced economic growth in emerging nations Additionally, issues such as economic mismanagement and governance crises exacerbate public debt levels and hinder growth in these countries.
This thesis investigates the impact of governmental debt on the growth of the Vietnamese economy, aiming to assess whether such debt fosters economic growth or imposes negative consequences The results indicate that government debt significantly influences sustained economic growth in both the short and long term, demonstrating an asymmetric effect It is concluded that government debt can facilitate economic growth by financing production; however, it should not become a burden if the debt levels surpass the economy's repayment capacity.
1 Đinh Văn Thông (2009) Học thuyết Keynes và những vấn đề kích cầu nhằm chống suy giảm kinh tế ở nước ta Tạp chí Khoa học ĐHQGHN, Kinh tế và Kinh doanh 25 (2009) 185-192
2 Hà Anh (2020), Kiểm soát chặt chẽ nợ công - “Chìa khóa” tăng dư địa chính sách tài khóa, Tạp chí Tài chính, https://tapchitaichinh.vn/Chuyen-dong-tai- chinh/kiem-soat-chat-che-no-cong-chia-khoa-tang-du-dia-chinh-sach-tai-khoa- 329759.html
3 Lê Mai Trang (2018) Hướng tới chính sách tài khóa bền vững và hỗ trợ tăng trưởng Hội thảo quốc gia
4 Phạm Duy Linh (2016), Chính sách tài khóa và tính chu kỳ kinh tế tại các nền kinh tế, Tạp chí Tài chính, kỳ 1 tháng 6/2016
5 Phạm Thị Tuệ, Lê Mai Trang (2018), Thực trạng chính sách tài khóa với tăng trưởng kinh tế Việt Nam, Tạp chí Công thương, tháng 7/2018
1 Acemoglu, D., S Naidu, P Restrepo, and J A Robinson (2013)
“Democracy Does Cause Growth.” NBER Working Paper 20004
2 Abbott, A and Jones, P (2013) Procyclical government spending: a public choice analysis Public Choice, 154(3-4):243–258
3 Agenor, PR, McDermott, J., and Prasad, ES, 1999 "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," IMF Working Paper 99/35 (Washington: International Monetary Fund)
4 Aghion, P and I Marinescu (2008), “Cyclical Budgetary Policy and Economic Growth: What Do We Learn from OECD Panel Data?”, NBER Macroeconomics Annual, Volume 22
5 Aghion, P., Hemous, D., and Kharroubi, E (2014) Credit constraints, cyclical fiscal policy and industry growth
6 Afonso, A., 2005 Fiscal Sustainability: The Unpleasant European Case FinanzArchiv: Public Finance Analysis, 61(1), pp.19-44(26)
7 Afonso, A., and J T Jalles (2013) “The Cyclicality of Education, Health, and Social Security Government Spending.” Applied Economics Letters 20 (7): 669–72
8 Alesina, Alberto, Guido Tabellini and Filipe R Campante (2008) “Why is Fiscal Policy Often Procyclical?” Journal of the European Economic Association, Vol 6, No 5, pp 1006-1036
9 Akitoby, B., B Clements, Gupta and G Inchauste S (2004) 'The Cyclical and Long-Term Behavior of Government Expenditures in Developing Countries', International Monetary Fund, Working Paper No WP / 04/202
10 Alberola, E Montero, J.M Braun, M and Cordella, T., 2006 Debt Sustainability and Procyclical Fiscal Policies in Latin America Economia, 7(1), pp.157-193
11 Abu Bakar, & Hassan (2008) Empirical evaluation on external debt of Malaysia International Business & Economics Research Journal, 7(2), 95-
12 Abubakar, A B., and Suleiman O M (2020) “Permanent and Transitory Effect of Public Debt on Economic Growth.” Journal of Economic Studies DOI:10.1108/JES-04-2020-0154
13 Adam, C S., & Bevan, D L (2005) Fiscal deficits and growth in developing countries Journal of Public Economics, 89(4), 571-597
14 Adom, P (2016), “The DDT effect: the case of economic growth, public debt and democracy relationship”, Munich Personal RePEc Archive, Vol 75022, pp 1 -35
15 Aschauer, D A (2000) Do states optimize? Public capital and economic growth The annals of regional science, 34(3), 343-363
16 Aizenman, J., Kletzer, K., & Pinto, B (2007) Economic growth with constraints on tax revenues and public debt: implications for fiscal policy and cross-country differences (No w12750) National Bureau of Economic Research
17 Abbas, A S M., & Christensen, J E (2007) The role of domestic debt markets in economic growth: An empirical investigation for low-income
117 countries and emerging markets (IMF working papers No 07/127) Washington, DC: International Monetary Fund
18 Abbas, S.M.A., Belhocine, N, El-ganainy, A.A & Horton, M.A (2011) Historical patterns and dynamics of public debt: Evidence from a new database IMF Economic Review, Vol 59(4), 717-742
19 Afonso, A., & Jalles, J T (2013) Economic performance and government size (ECB Working Paper No 1399) Frankfurt, Germany: European Central Bank
20 Afonso, A., and Alves, J R (2015) “The Role of Government Debt in Economic Growth.” Review of Public Economics 215 (4): 9–26
21 Ahlborn, M., & Schweickert, R (2016, March) Public debt and economic growth—Economic systems matter (CEGE Discussion Paper No 281) Gửttingen, Germany
22 Aminu, U., Aminu, H A and Salihu, M (2013) External debt and domestic debt impact on the growth of the Nigerian economy Munich Personal RePEc Archive, MPRA Paper No 75122
23 Ardagna, S.; Caselli, F.; and Lane, T (2007) “Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries.” B.E Journal of Macroeconomics 7 (1): 1–33
24 Alshammary, M D.; Karim, Z A.; Khalid, N.; and Ahmad, R (2020) “Debt- Growth Nexus in the MENA Region: Evidence from a Panel Threshold Analysis.” Economies 8 (4): 1–12
25 Barro, R J (1974) Are government bonds net wealth? Journal of Political Economy, 82, 1095-1117
26 Barro, R.J (1976) Reply to Feldstein and Buchanan, Journal of Political Economy, 84, 343-349
27 Barro, R J (1989) The Ricardian approach to budget deficits The Journal of Economic Perspectives, 3, 37-54
28 Babu, J O., Kiprop, S., Kalio, A M and Gisore, M (2014) External debt and economic growth in the East Africa community African Journal of Business Management, 8(21): 1011-18
29 Baum, A., Checherita-Westphal, C., & Rother, P (2012) Debt and growth: New evidence for the Euro Area ECB Working Paper No 1450 July 2012
30 Ball, Lawrence, and N Gregory Mankiw 1995 “What do Budget Deficits Do?” NBER Working Paper #5263 Cambridge, Mass
31 Bernheim, B D., & Bagwell, K (1988) Is everything neutral? Journal of Political Economy, 96, 308-338
32 Bird, R M (1971) Wagner’s law of expanding state activity Public Finance,
26, 1-26 Bohn, H (1998) “The behaviour of U.S public debt and deficits”, Quarterly Journal of Economics, 113, 949-963
33 Bhimjee, D., and Leão, E (2020) “Public Debt, GDP and the Sovereign Debt Laffer Curve: A Country-Specific Analysis for the Euro Area.” Journal of International Studies 13 (3): 280–95
34 Broner, F., Aitor, E., Alberto, M., & Jaume, V (2014) Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects Journal of Monetary Economics, 61, 114-142
35 Buchanan, J M (1958) Public principles of the public debt Homewood, IL: Richard D Irwin
36 Buchanan, J M (1976) Barro on the Ricardian equivalence theorem Journal of Political Economy, 84, 337-342
37 Buchanan, J.M., & Roback, J (1987) “The Incidence and Effects of Public Debt in the Absence of Fiscal Illusion”, Public Finance Quarterly, Vol 15,
38 Buffie, E F., Berg, A., Pattillo, C., Portillo, R., & Zanna, L F (2012) Public investment, growth, and debt sustainability: Putting together the pieces (IMF Working Paper No 12/144) Washington, DC: International Monetary Fund
39 Buffie, E F., Berg, A., Pattillo, C., Portillo, R., & Zanna, L F (2012) Public investment, growth, and debt sustainability: Putting together the pieces (IMF Working Paper No 12/144) Washington, DC: International Monetary Fund
40 Bửkemeier, B., and Greiner, A (2015) “On the Relation between Public Debt and Economic Growth: An Empirical Investigation.” Economics and Business Letters 4 (2): 137–50
41 Barro, Robert (1979) “On the Determination of Public Debt” Journal of Political Economy, vol 87 No 5 pp 940-971
42 Barro, R.J (1990), Government Spending in a Simple Model of Endogenous Growth, Journal of Political, Economy 98, part 2, S103-S125
43 Blanchard, O Chouraqui, J.C Hagemann, R.P and Sartor, N., 1990 The Sustainability of Fiscal Policy: New Answers to an Old Question OECD Journal: Economic Studies, 15, pp.7-36
44 Carmen M Reinhart, Carlos A Végh (2004), When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies, NBER Macroeconomics Annual 2004, Volume 19, MIT Press
45 Caballero, R and Krishnamurthy, A (2004) “Fiscal Policy and Financial Depth” NBER Working Paper 10532, May
46 Calderón, César and Klaus Scmidt-Hebbel (2008) ”Business Cycles and Fiscal Policies: The Role of Institutions and Financial Markets” Central Bank of Chile Working Paper No 481
47 Calderón, C., Duncan, R., and Schmidt-Hebbel, K (2010) Institutions and cyclical proper-ties of macroeconomic policies in the global economy Documentos de Trabajo (Instituto de Economía PUC), (372):1
48 Calderón, C., Duncan, R., and Schmidt-Hebbel, K (2016) Do good institutions promote countercyclical macroeconomic policies? Oxford Bulletin of Economics and Statistics, 78(5):650–670
49 Céspedes, L F and Velasco, A (2014) Was this time different?: Fiscal policy in commodity republics Journal of Development Economics, 106:92–
50 Chari, Varadarajan, Lawrence Christiano and Patrick Kehoe (1994) “Optimal Fiscal Policy in a Business Cycle Model” NBER Research Paper 4490
51 Caner, M., Grennes, T., & Koehler-Geib, F (2010) Finding the tipping point: When sovereign debt turns bad In C Braga & G Vincelette (Eds.), Sovereign debt and the financial crisis: Will this time be different? Washington, DC: The World Bank pp: 1-460
52 Caner, M.; Fan, Q.; and Grennes, T (2019) “Partners in Debt: An Endogenous Nonlinear Analysis of Interaction of Public and Private Debt on
Growth.” Mercatus Center at George Mason University, Mercatus Working Paper
53 Castro, G., Félix, R.M., Júlio, P and Maria, J.R (2015), “Unpleasant debt dynamics: can fiscal consolidation raise debt ratios?”, Journal of Macroeconomics, Vol 44, pp 276-294
54 Cecchetti, S G., Mohanty, M S., & Zampolli, F (2010) The Future of Public Debt: Prospects and Implications (BIS Working Papers No 300) Basel: Bank for International Settlements
55 Cecchetti, S G., Mohanty, M S., & Zampolli, F (2011) The Real Effects of Debt (BIS Working Papers No 352) Basel: Bank for International Settlements
56 Checherita-Westphal, C., & Rother, P (2010) The impact of high and growing government debt on economic growth An empirical investigation for the Euro Area” ECB Working Paper No 1237 August 2010
57 Christensen, J E (2004) Domestic debt markets in Sub-Saharan Africa (IMF Working Paper No 04/46) Washington, DC: International Monetary Fund
58 Choong, C K., Lau, E., Liew, V K S., & Puah, C H (2010) Does debts foster economic growth? The experience of Malaysia African Journal of Business Management, 4(8), 1564-1575
59 Churchman, N (2001) David Ricardo on public debt New York, NY: Palgrave
60 Chudik, A.; Mohaddes, K.; Pesaran M H.; and Raissi M (2013) “Debt, Inflation and Growth Robust Estimation of Long-Run Effects in Dynamic Panel Data Models.” Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No 162
61 Claessens, S (1990) The debt Laffer curve: Some estimates, World Development,18(12), 1671-1677
62 Clements, B., Bhattacharya, R., & Nguyen, T Q (2003) External debt, public investment and growth in low-income countries (IMF Working Paper
No 03/249) Washington, DC: International Monetary Fund
63 Cochrane, J H (2011a) Inflation and debt National Affairs, 9, 56-78
64 Cochrane, J H (2011b) Understanding policy in the great recession: Some unpleasant fiscal arithmetic European Economic Review, 55, 2-30
65 Cordella, T., Ricci, L.A., & Ruiz-Arranz, M (2010) Debt Overhang or Debt Irrelevance?, IMF Staff Papers, 57(1), 1-24
66 Cox, D., & Jappelli, T (1990) Credit rationing and private transfers: Evidence from survey data Review of Economics and Statistics, 72, 445-454
67 Dafermos, Y (2015) The “other half” of the public debt-economic growth relationship: A note on Reinhart and Rogoff European Journal of Economics and Economic Policies, 12, 20-28
68 Danso, A (1990) The causes and impact of the African debt crisis The Review of Black Political Economy, 19, 5-21
69 Davenant, C (1701) An essay upon ways and means of supplying the war (3rd ed.) London, England: J Tonson
70 Davenant, C (1712) An act for the taking, examining, and starting the public accounts of the kingdom (Part I) London, England
71 Delong, B J., & Summers, L H (2012) Fiscal policy in a depressed economy Brookings Papers on Economic Activity Retrieved from https://www.brookings.edu/bpea-articles/ fiscal-policy-in-a-depressed- economy/
72 Diamond, P A (1965) National debt in a neoclassical growth model The American Economic Review, 55(5), 1126-1150
73 Dincaˇ, G., and Dincaˇ, M S (2015) “Public Debt and Economic Growth in the EU Post-Communist Countries.” Journal for Economic Forecasting (June): 119–32
74 Donayre, L and Taivan, A (2017), “Causality between public debt and real growth in the OECD: a country-by country analysis”, Economic Papers: A Journal of Applied Economics and Policy, Vol 36 No 2, pp 156-170
75 Debrun, X and R Kapoor (2011), Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications, Nordic Economic Policy Review, 1(1), 35-70
76 Debrun, X., Pisani-Ferry, J., Sapir, A (2008) Government Size and Output Volatility: Should We Forsake, European Economy, Economic papers 316
77 Dumitrescu, B.A., 2015 The Fiscal Consolidation Consequences on Economic Growth in Romania Romanian Journal for Economic Forecasting, 18(3), pp 136-151
78 Ernesto Talvi and Carlos Vegh (2005), Tax base variability and procyclical fiscal policy in developing countries, Journal of Development Economics, vol 78, issue 1, 156-190
79 Easterly, William (2001) “The Elusive Quest for Growth” Cambridge, MA: MIT Press
80 Easterly, W and Rebelo, S., 1993 Fiscal Policy and Economic Growth: An Empirical Investigation Journal of Monetary Economics, 32(3), pp.417–458
81 Engen, M.E and Skinner, J., 1996 Taxation and economic growth National Tax Journal, 49(4), pp.617-642
82 Eyraud, Luc, Gaspar, V and Poghosyan, T., 2017 Fiscal Politics in the Euro Area IMF Working Paper WP/17/18
83 Ernesto Stein, Ernesto Talvi, and Alejandro Grisanti, 1999 "Institutional Arrangements and Fiscal Performance: The Latin American Experience," NBER Working Paper No 6358
84 Égert, B (2012, October 17) Public debt, economic growth and nonlinear effects: Myth or reality? (OECD Economic Department Working Paper No
993) Retrieved from http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote O/ WKP(2012)70&docLanguage=En
85 Elmendorf, D W., & Mankiw, G N (1999) Government debt In J B Taylor & M Woodford (Eds.), Handbook of macroeconomics (Vol 1, Chapter 25, pp 1615-1669) Elsevier, Amsterdam: North Holland
86 Eberhardt, M., and Presbitero, A F (2015) “Public Debt and Growth: Heterogeneity and Non-linearity.” Journal of International Economics 97 (1): 45–58
87 Égert, B (2015) “Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality?” Journal of Macroeconomics 43: 226–38
88 Feldstein, M (1976) Perceived wealth in bonds and social security: A comment Journal of Political Economy, 84, 331-336
89 Freeman, S., & Webber, D J (2009) Basic needs, government debt and economic growth The World Economy, 32(6), 965-994
90 Fatás, Antonio and Ilian Mihov (2009) “The Euro and Fiscal Policy” NBER Working Paper 14722
91 Fatas, A and I Mihov (2013) “Policy Volatility, Institutions, and Economic Growth.” Review of Economics and Statistics 95: 362-376.,
92 Frankel, J., C Vegh and G Vuletin (2011) “On graduation from fiscal procyclicality,” NBER Working Paper No 17619 (November)
93 Finn E Kydland and Edward C Prescott (1982), Time to Build and Aggregate Fluctuations, Econometrica, Vol 50, No 6 (Nov., 1982), pp 1345-1370
94 Furceri, D and J T Jalles, 2016 “The Effect of Fiscal Policy on RD investment”, IMF Working paper (forthcoming)
95 Fatas, A and I Mihov (2013) “Policy Volatility, Institutions, and Economic Growth.” Review of Economics and Statistics 95: 362-376
96 Gale, William, and Peter Orsag 2004 “Budget Deficits, National Savings, and Interest Rates.” Brookings Papers on Economic Activity, Volume 2
97 Ghourchian, S., and Yilmazkuday, H (2020) “Government Consumption, Government Debt and Economic Growth.” Review of Development Economics 24 (2): 589–605
98 Gómez-Puig, M., & Sosvilla-Rivero, S (2015) On the bi-directional causal relationship between public debt and economic growth in EMU countries (University of Barcelona Research Institute of Applied Economics Working
Paper No 15-06) Retrieved from https://ideas.repec.org/p/aee/wpaper/1506.html
99 Gómez-Puig, M., & Sosvilla-Rivero, S (2017) Public debt and economic growth: Further evidence for the Euro area (Research Institute of Applied Economics Working Paper 2017/15) Institut de Recerca en Economia
Aplicada Regional i Pública Retrieved from http://www.ub.edu/irea/working_papers/2017/201715.pdf
100 Greiner, A (2006) Human capital formation, public debt and economic growth Journal of Macroeconomics, 30, 415-427
101 Greiner, A (2011) Economic growth, public debt and welfare: Comparing three budgetary rules German Economic Review, 12, 205-222
102 Gulde, A., Pattillo, C., & Christensen, J (2006) Sub-Saharan Africa: Financial sector challenges Washington, DC: International Monetary Fund
103 Granger, C W J., Newbold, P (1987) Spurious regressions in econometrics Journal of Econometrics 2: 111-120
104 Gavin, M and R Perotti (1997), "Fiscal Policy in Latin America", in
B Bernanke and Rotemberg J (eds), NBER Macroeconomics Annual 12, Cambridge, MA: MIT Press, pp 11-70
105 Gechert, S., Rannenberg, A., 2014 Are Fiscal Multipliers Regime- Dependent? A Meta Regression Analysis, IMK Working Paper No 139, September, Dỹsseldorf: IMK in der Hans-Bửckler-Stiftung
106 Halland, H and Bleaney, M (2011) Explaining the procyclicality of fiscal policy in devel-oping countries Technical report, CREDIT Research Paper
107 Herndon, T., Ash, M., & Pollin, R (2013) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff (PERI Working Paper No 322) Amherst: Political Economy Research Institute, University of Massachusetts
108 Herndon, T., Ash, M., & Pollin, R (2014) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff Cambridge Journal of Economics, 38, 257-279
109 Holtfrerich, C L (2013, April) Government debt in economic thought of the long 19th century (Discussion paper) Contributed to the symposium on “Government Debt in Democracies,” Berlin, Germany
Huang, Y., Panizza, U., and Varghese, R (2018) investigate the impact of public debt on corporate investment in their working paper, "Does public debt crowd out corporate investment? International evidence," published by The Graduate Institute of International Studies The research provides international evidence suggesting that rising public debt levels may negatively affect corporate investment decisions, highlighting the complex relationship between government borrowing and private sector growth For further details, the full paper can be accessed at the Graduate Institute's repository.
111 Hume, D (1752) Of Public Credit In Miller, E.F (ed) Essays Moral, Political and Literary Liberty Fund 1987, pp 205-213
112 Hutcheson, A (Ed.) (1714) A collection of treatises relating to the national debts and funds London, The South Sea Company
113 Hoàng Khắc Lịch và Dương Cẩm Tú (2018), Ảnh hưởng của nợ công tới tăng trưởng kinh tế, Tạp chí Khoa học ĐHQGHN: Kinh tế và Kinh doanh, Tập 34, Số 1 (2018) 32-41
Nợ công có tác động đáng kể đến tăng trưởng kinh tế ở các quốc gia trên thế giới, theo nghiên cứu của Hoàng Thị Hạnh (2020) Bài viết phân tích mối quan hệ giữa nợ công và sự phát triển kinh tế, chỉ ra rằng nợ công cao có thể kìm hãm tăng trưởng, trong khi nợ công được sử dụng hiệu quả có thể thúc đẩy đầu tư và phát triển Nghiên cứu nhấn mạnh tầm quan trọng của việc quản lý nợ công để đảm bảo sự ổn định và tăng trưởng bền vững.
115 International Monetary Fund (2005) Monetary and fiscal policy design issues in low-income countries Washington, DC: Author
116 International Monetary Fund (2013) Public sector debt statistics: A guide for compilers and users Washington, DC: Author
117 Ilzetzki, E (2011) Rent-seeking distortions and fiscal procyclicality Journal of Develop-ment Economics, 96(1):30–46
118 Ilzetski, Ethan and Carlos A Végh (2008) “Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?” NBER Working Paper 14191
119 Kaminsky, Graciela L., Carmen M Reinhart, Carlos A Végh (2004)
“When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies” NBER Working Paper 10780
120 Kydland E F and Edward C P (1982), Time to Build and Aggregate Fluctuations, Econometrica, Vol 50, No 6 (Nov., 1982), pp 1345-1370
121 Keynes M (1936), The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press
122 King, R.G Plosser, C.I and Rebelo, S.T., 1988 Production, Growth and Business Cycles Journal of Monetary Economics, 21(2-3), pp.195-232
123 King, G.R and Rebelo, S., 1990 Public Policy and Economic Growth: Developing Neoclassical Implications Journal of Political Economy, 98(5), pp.126-150
124 Karadam, D Y (2018) “An Investigation of Nonlinear Effects of Debt on Growth.” Journal of Economic Asymmetries 18: 1–13
125 Kobayashi, K (2015) Public debt overhang and economic growth Public Policy Review, 11, 247-276
126 Kourtellos, A., Stengos, T., & Tan, C M (2013) The effect of public debt on growth in mul-tiple regimes Journal of Macroeconomics, 38, 35-43
127 Krugman, P (1988) Financing vs forgiving a debt overhang Journal of Development Economics, 29, 253-268
128 Krugman, P (2013) “How the Case for Austerity Has Crumbled.” New York Review (June 6)
129 Kumar, S M., & Woo, J (2010, July) Public debt and growth (IMF
Working Paper 2010/174) Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Public-Debt - and-Growth-24080
130 Kirchner, M., Cimadomo, J., & Hauptmeier, S (2010) Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces (ECB Working Paper Series No 1219) Frankfurt: ECB
131 Kirchner, M., Cimadomo, J., & Hauptmeier, S (2010) Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces (ECB Working Paper Series No 1219) Frankfurt: ECB
132 Kharusi, S.A and Ada, M.S (2018), “External debt and economic growth: the case of emerging economy”, Journal of Economic Integration, Vol 33 No 1, pp 1141-1157
133 Krugman, P (1989) Financing vs Forgiving a Debt Overhang NBER Working Paper Series N 2486
134 Krugman, P (1988) Financing vs forgiving a debt overhang Journal of development Economics, 29(3), 253-268
135 Kumar, M S., & Woo, J (2010) Public Debt and Growth (IMF Working Paper 10/174) Washington, D.C.: IMF
136 Krumm, L.K (1985), “The external debt of Sub-Saharan africa: origins, magnitude, and implications for action”, Working Paper, 741, World Bank, Washington, DC
137 Lybeck, J A (1988) Comparing government growth rates: The non- institutional vs the institu-tional approach In J A Lybeck, & M Henkerson
(Eds.), Explaining the growth of govern-ment (pp 29-48) Amsterdam, The Netherlands: North-Holland
138 Lim, J J (2019) “Growth in the Shadow of Debt.” Journal of Banking and Finance 103: 98–112
139 Lane, P R (2003), “The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD,” Journal of Public Economics, 87(12), 2661–2675
140 Lewis, J., 2009 Fiscal policy in Central and Eastern Europe with real time data: Cyclicality, inertia and the role of EU accession DNB Working Paper 214/2009
141 Maynard Keynes (1936), The General Theory of Employment, Interest and Money, Macmillan Cambridge University Press
142 Manasse, Paolo (2005) “Deficit Limits, Budget Rules and Fiscal Policy” IMF Working Paper 05/120
143 Manasse, P (2006) Procyclical fiscal policy: Shocks, rules, and institutions-a view from mars
144 Michael Gavin, Roberto Perotti (1997), Fiscal Policy in Latin America, Chapter in NBER book NBER Macroeconomics Annual 1997, Volume 12 (1997), MIT Press
145 Mankiw, N.Gregory, David Romer, and David Weil (2005), A Contribution to the Empirics of Economic Growth, Quarterly Journal of Economics, 107, 407-38
146 Mankiw, N.G Romer, D and Weil, D.N., 1992 A Contribution to the Empirics of Economic Growth The Quarterly Journal of Economics, 107(2), pp.407–437
147 Myles, G.D., 2000 Taxation and Economic Growth Fiscal Studies The Journal of Applied Public Economics, 21(1), pp.141- 168
148 Marquez, N (2000), “Debt sustainability in the ECCB area”, Social and Economic Studies, Vol 49 Nos 2/3, pp 77-108
149 Meade, J E (1958) Is the national debt a burden? Oxford Economic Papers, 10, 163-183 Minea, A., & Parent, A (2012) Is high public debt always harmful to economic growth?
150 Mankiw, N G (2013) Macroeconomics US: Worth Publishers
151 Mohd Dauda, S N., Ahmad, A H., & Azman-Saini, W N W (2013) Does External Debt Contribute to Malaysia Economic Growth? Economic Research-Ekonomska Istraživanja, 26(2), 51-68
152 Myers, S C (1977) Determinants of corporate borrowing Journal of financial economics, 5(2), 147-175
153 Modigliani, F (1961) Long-run implications of alternative fiscal policies and the burden of the national debt Economic Journal, 71, 730-755
154 Moss, T., Pettersson, N., & de Walle, N V (2006) An aid- institutions paradox? (Centre for Global Development Working Paper 74) Washington, DC: Centre for Global Development
155 Mupunga, N., & Le Roux, P (2015) Estimating the optimal growth- maximising public debt threshold for Zimbabwe Southern African Business Review, 19, 102-128
156 Myers, S C (1977) Determinants of corporate borrowing Journal of Financial Economics, 5, 147-175
157 Minea, A and Parent, A 2012 Is high public debt always harmful to economic growth? Reinhart and Rogoff and some complex nonlinearities Association Franaise de Cliomtrie (AFC) Working Paper, pp.12-08 Newey
WK, West KD (1994) Automatic lag selection in covariance matrix estimation Review of Economic Studies 61:631–653
In their 2008 paper presented at the 13th Annual African Econometric Society Conference in Pretoria, Maana, Owino, and Mutai explore the implications of domestic debt on Kenya's economy They analyze how domestic borrowing affects economic growth and stability, providing insights into the broader economic landscape of the country Their findings highlight the critical relationship between government debt management and economic performance in Kenya.
External debt significantly influences economic growth in Pakistan, as evidenced by various studies conducted over the years Research indicates that external debt, while necessary for financing deficits and stimulating growth, often has detrimental effects on GDP growth rates Specifically, empirical analysis from 1980 to 2016 reveals that external debt and total debt service negatively impact economic performance, necessitating policy interventions to manage debt levels and enhance foreign investment Furthermore, the relationship between external debt and economic growth demonstrates a critical need for effective fiscal policies to mitigate the adverse effects of high debt on the economy.
160 Mankiw, N G (2013) Macroeconomics US: Worth Publishers
161 Mercinger, J.; Aristovnik, A.; and Verbicˇ, M (2014) “The Impact of Growing Public Debt on Economic Growth in the European Union.” Amfiteatru Economic Journal 16 (35): 403–14
162 Ndikumana, L & Boyce, J K (2003) “Public Debts and Private Assets: Explaining Capital Flight from Sub-Saharan African Countries”, World Development, 31(1), 107-130
163 Ndikumana, L & Boyce, J.K (2015) Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, Journal of Economic and Social Thought, 3(2), 217-223
164 Navarat Temsumrit, 2020 Does Democracy Affect Cyclical Fiscal Policy? Evidence From Developing Countries Puey Ungphakorn Institute for Economic Research, pp 125
In their 2004 paper presented at the AEA-NAEFA Session during the ASSA meetings in San Diego, Peter Orszag, Allen Sinai, and Robert Rubin discuss the implications of sustained budget deficits on the long-term economic performance of the United States They highlight the potential risks associated with financial instability and fiscal disarray stemming from persistent deficits.
166 Owusu-Nantwi, V., & Erickson, C (2016) Public debt and economic growth in Ghana African Development Review, 28, 116-126
167 Ogunmuyiwa, M.S (2011), “Does external debt promote economic growth in Nigeria”, Current Research Journal of Economic Theory, Vol 3
168 Panizza, U., & Presbitero, A.F (2012) Public debt and economic growth: Is there a causal effect? POLIS Working Paper No 198 April 2012
169 Panizza, U., & Presbitero, A F (2013, January) Public debt and economic growth in advanced economies: A survey (MoFiR Working Paper
No 78) Retrieved from https://ideas.repec.org/p/anc/wmofir/78.html
170 Panizza, U., & Presbitero, A F (2014) Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41, 21-41
171 Patinkin, D (1965) Money, interest and prices (2nd ed.) New York, NY: Harper & Row
172 Pattillo, C., Poirson, H., & Ricci, L (2002) External debt and growth (IMF Working Paper No 02/69) Washington, DC: International Monetary Fund
173 Panizza, U., & Presbitero, A F (2014) Public debt and economic growth: is there a causal effect? Journal of Macroeconomics, 41, 21-41
174 Pattillo, C A., Poirson, H., & Ricci, L A (2002) External debt and growth (No 2002-2069) International Monetary Fund
175 Padoan, P C.; Sila, U.; and Van Den Noord, P (2013) “Avoiding Debt Traps: Fiscal Consolidation, Financial Backstops and Structural Reforms.” OECD Journal: Economic Studies 2012 (1): 151–77
176 Perotti, R (1999) Fiscal Policy in Good Times and Bad Quarterly
Journal of Economics, 138, 1399–1435 http://dx.doi.org/10.1162/003355399556304
177 Pereira, A M., & Rodrigues, P G (2001) Public debt and economic performance (Ministộrio das Finanỗas, DGEP Working Paper 20) Retrieved from http://www.gpeari.gov.pt/inves-tigacao/working-papers/w-papers- dgep/w-paper20.pdf
178 Perotti, R (2012) The austerity myth: Gain without pain? In Fiscal policy after the financial crisis (NBER chapters) National Bureau of Economic Research Retrieved from https:// www.nber.org/papers/w17571
179 Pegkas, P.; Staikouras, C.; and Tsamadias C (2020) “On the Determinants of Economic Growth: Empirical Evidence from the Eurozone Countries.” International Area Studies Review 23 (2): 210–29
180 Putunoi, G K and Mutuku, C M (2013) Domestic debt and economic growth nexus in Kenya Current Research Journal of Economic Theory, 5(1): 1-10
181 Presbitero AF (2012) Total public debt and growth in developing countries Eur J Dev Res 24(4):606–626
182 Presbitero, A F (2010) The debt-growth nexus in Jamaica Rome, Italy: Università Politecnica delle Marche
183 Pham, T H A.; Mai, B D.; and Nguyen, T T (2020) “The Impact of Public Debt on Economic Growth of ASEAN 1 3 Countries.” International Journal of Economics and Business Administration 8 (4): 87–100
184 Rahman, N H A (2012) How Federal Government's Debt Affect the Level of Economic Growth? International Journal of Trade, Economics and Finance, 3(4), 323-326
185 Reinhart, C M., & Rogoff, K S (2010) Growth in a Time of Debt, in ôAmerican Economic Reviewằ In Papers and Proceedings (Vol 100, No 2, pp 1-9)
186 Reinhart, C M., & Rogoff, K S (2012) From financial crash to debt crisis The American Economic Review, 101(5), 1676-1706
187 Ricciuti, R (2001) Assessing Ricardian equivalence Società Italiana di Economia Pubblica Retrieved from http://www.siepweb.it/siep/images/joomd/1397927437048.pdf
188 RICARDO D (1951), On the Principles of Political Economy and Taxation, in P Sraffa, ed., with the collaboration of M Dobb, The Works and Correspondence of David Ricardo, vol I, Cambridge: Cambridge University Press, 1951 [1817]]
189 Rodrik, D (1998) “Why Do More Open Economies Have Bigger Governments,” Journal of Political Economy 106, 997-1032
190 Riascos, Álvaro and Carlos A Végh (2004) “Procyclical Fiscal Policy in Developing Countries: The Role of Capital Market Imperfections” University of California at Los Angeles, manuscript retrieved 28.01.10
191 R Musgrave và P Musgrave (1989), Public Finance: Theory and Practice, McGraw Hill Education
192 Suzuki, Y (2015) Sovereign risk and procyclical fiscal policy in emerging market economies The Journal of International Trade & Economic Development, 24(2):247–280
193 Stokey, N.L and Rebelo, S., 1995 Growth Effects on Flat-Rate Taxes Journal of Political Economy, 103(3), pp.519-550
194 Stoian, A Obreja Brașoveanu, L Brașoveanu, I.V and Dumitrescu, B., 2018 A Framework to Assess Fiscal Vulnerability: Empirical Evidence for European Union Countries Sustainability 2018, 10(7), 2482, pp 1-20
195 Strawczynski, M and Zeira, J., 2011 Procyclicality of Fiscal Policy in Emerging Countries: The Cycle is the Trend Working Paper 624, Central Bank of Chile
196 Soren Johansen (1990) “Testing for Cointegration Using the Johansen Methodology when Variables are Near-Integrated” Journal of IMF Working paper W07/1041
197 Sachs, J D (1989) The debt overhang of developing countries In G
A Calvo, R Findlay, P Kouri, & J B de Macedo (Eds.), Debt stabilization and development (pp 80-102) Oxford, UK: Basil Blackwell
198 Schclarek, A (2004) Debt and economic growth in developing and industrial countries (Lund University Department of Economics Working
Paper No 34) Retrieved from http://portal research.lu.se/portal/files/5740791/2061440
199 Seater, J J (1993) Ricardian equivalence Journal of Economic Literature, 31, 142-190
200 Seater, J J., & Mariano, R S (1985) New tests of the life cycle and tax discounting hypothesis Journal of Monetary Economics, 15, 196-215
201 Smith, A (1776) An inquiry into the nature and causes of the wealth of nations (W Stahan & T Cadell, Eds.) London, England London: Uninted Kingdom MetaLibri Digital Library, pp 1-754
202 Soydan, A., & Bedir, S (2015) External debt and economic growth: New evidence for an old debate Journal of Business Economics and Finance,
203 Szabo, Z (2013) The effect of sovereign debt on economic growth and economic develop-ment Retrieved from https://www.asz.hu/storage/files/files/public-finance-quarterly - articles/2013/a_szabo_2013_3.pdf
204 Saint-Paul, G (1992) Fiscal policy in an endogenous growth model The Quarterly Journal of Economics, 107(4), 1243-1259
205 Shkolnyk, I and Koilo, V (2018), “The relationship between external debt and economic growth: empirical evidence from Ukraine and other emerging economies”, Investment Management and Financial Innovations, Vol 15 No 1, pp 387-400
206 Saifuddin, M (2016) Public debt and economic growth: Evidence from Bangladesh Global Journal of Management and Business Research: B Economics and Commerce, 16(5): 65–73
207 Sheikh, M R., Faridi, M Z and Tariq, K (2010) Domestic debt and economic growth in Pakistan: An empirical analysis Pakistan Journal of Social Sciences, 30(2): 373-87
208 Shin, Y., Yu, B and Greenwood-Nimmo, M., 2014 Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework In Festschrift in Honor of Peter Schmidt, pp 281-314 Springer New York
209 Stambuli, P.K (1998), “Causes and consequences of the 1982 world debt crisis”, Predoctoral Research Paper Department of Economics University of Surrey Guildford, pp 1-35
210 Siddique, A.; Selvanathan, E A.; and Selvanathan, S (2016) “The Impact of External Debt on Growth: Evidence from Highly Indebted Poor Countries.” Journal of Policy Modeling 38 (5): 874–94
211 Sniesˇka, V., and Burksaitiene, D (2018) “Panel Data Analysis of Public and Private Debt and House Price Influence on GDP in the European Union Countries.” Engineering Economics 29 (2): 197–204
212 Swamy, V (2020) “Debt and Growth: Decomposing the Cause and Effect Relationship.” International Journal of Finance and Economics 25 (2): 141–56
213 Teles, V K., & Mussolini, C C (2014) Public debt and the limits of fiscal policy to increase economic growth European Economic Review, 66, 1-15
214 Topal, P (2014) “Threshold Effects of Public Debt on Economic Growth in the Euro Area Economies.” SSRN Working Paper, Social Science Research Network
215 Talvi, Ernesto and Carlos A Végh (2005) “Tax Base Variability and Procyclical Fiscal Policy in Developing Countries” Journal of Development Economics, Vol 78, pp 156-190
216 Thornton, John (2008) “Explaining Procyclical Fiscal Policy in African Countries” Journal of African Economies, Vol (17), No 3, pp 451-
217 Tornell, Aaron and Philip R Lane (1999) “The Voracity Effect” American Economic Review, Vol
218 Vinokurov, E.; Lavrova, N.; and Petrenko, V (2020) “Optimal Debt and the Quality of Institutions.” Eurasian Development Fund for Stabilization and Development Working Paper No 20/4, Eurasian Development Bank
219 Uzun, A., Kabadayi, B., & Emsen, O S (2012) The impacts of external debt on economic growth in transition economies Chinese Business Review, 11, 491-499
220 Wagner, A (1893) Grundlegung der Politischen Okonomie [Text and Handbook of Political Economy] (3rd ed.) Leipzig, Germany: C F Winter
221 Wagner, A (1911) Staat in nationalửkonomischer [The state in Economic Perspective] Hinsicht In Gustav Fisher (ed.) Handwửrterbuch der Staatswissenschaften (3rd ed., pp 743-745) Jena, Germany: Lexispp
222 Woo, J and Kumar, M S (2015) “Public Debt and Growth.” Economica 82 (328): 705–39
223 Woo, Jaejong (2009) “Why Do More Polarized Countries Run More Procyclical Fiscal Policy?” The Review of Economics and Statistics, Vol 91,
224 Yeasmin, F and Chowdhury, M N M (2014) Impact of foreign debt on economic growth in bangladesh: An econometrics analysis International Journal of Developing and Emerging Economics, 2(4): 1-23
APPENDIX EXAMINING THE RELATIONSHIP BETWEEN FISCAL
STATIONARY TEST OF DATA SERIES
COINTERGRATION TEST
CAUSALITY TEST
LAG ORDER SELECTION CRITERIA
THE STABILITY TEST OF THE MODEL
THE VECM
IMPULSE RESPONSE FUNCTION
DECOMPOSTION
APPENDIX EXAMINING THE IMPACT OF PUBLIC DEBT ON
UNIT ROOT TEST
DATA DESCRIPTION
THE ECR TEST
THE NARDL MODEL
THE BREUSCH TEST
THE LONG RUN AND BOUNDS TEST
THE RAMSEY TEST
THE WALD TEST
Test Statistic Value df Probability t-statistic -1.276413 68 0.02062
Normalized Restriction (= 0) Value Std Err
Restrictions are linear in coefficients
PLOT OF CUMULATIVE SUM OF RESIDUALS CUSUM
PLOT OF THE CUMULATIVE SUM OF SQUARES OF
STABILITY TEST OF THE MODEL
4.1.2 Results of testing the relationship between fiscal policy and economic growth
After conducting VECM model tests, VECM regression model results are obtained as follows: u = GDP - 0.095912EXP + 1.881209LIA + 26.02291TAX+ 3.100242 GDP = -3.100242 + 0.095912EXP - 1.881209LIA - 26.02291TAX+ u
In the long run, the volatility of GDP is positively related to the volatility of EXP and inversely with the volatility of LIA and TAX
Combination of non-stationary sequences into a stationary sequence, and ECt-1 is the residual in that combination ECt-1 = α indicates an imbalance in the t-
1 period, α is the adjustment coefficient when an imbalance occurs in the short run
The ECt-1 value of -0.910403 indicates that when there is a 1-unit imbalance in the previous period, the dependent variable will adjust back to equilibrium by 91% in the first period Consequently, it will take more than two periods for full restoration of equilibrium.
This article examines the causal relationship between fiscal policy and the business cycle by constructing variance decomposition and impulse response functions These analytical tools facilitate the evaluation of both direct and indirect effects of shocks in one factor on another, allowing for a deeper understanding of their interactions.
90 dynamic connection The author use the Cholesky factor coefficient recommended by Sims (1980) to determine the system's shocks
Figure 4.2 The Impulse Response function of EXP, TAX, LIA, GDP
Government spending volatility shocks initially lead to a positive impact on real GDP, particularly evident in the first four periods This phenomenon can be attributed to Vietnam's status as a developing nation, where increased government investment enhances production and fosters economic growth However, as spending begins to exceed production needs around the sixth period, the GDP response experiences slight fluctuations in the long term.
The responsiveness of GDP to LIA shocks has shifted since the initial phase, with increased government borrowing leading to heightened interest rate volatility and potential crowding-out effects on the private sector Consequently, variations in government debt significantly impact economic growth.
Similarly, tax income is one of the indicators of the response of the economy to the state's fiscal policies Increasing tax income is not always conducive to economic growth
When economic development slows, government spending decreases, and the government increases both public debt and tax collections to cover the deficit
In the VECM model, variance decomposition of error helps identify the contributions of individual time series and their interactions, revealing the significant role of fiscal policy in the business cycle Despite a projected inaccuracy of about 3% in GDP due to fluctuations in government expenditure, this discrepancy has remained consistent over time without signs of reduction Additionally, government debt volatility surpasses 4% of GDP volatility, while tax revenue's impact on economic growth becomes substantial when it exceeds 10% This aligns with Vietnam's fiscal strategy, which heavily relies on tax collection.
Period S.E D(GDP,2) D(EXP,2) D(LIA,2) D(TAX,2)
The study results are consistent with earlier research Fiscal policy in developing countries is pro-cyclical (Acemoglu et al., 2013; Fatas and Mihov,
Developing nations often struggle with inadequate stabilizing instruments, such as unemployment insurance and social benefits, leading to a budget primarily comprised of recurring government expenses and wages In these countries, indirect taxes, including trade and consumption taxes, are more commonly utilized than direct taxes like income tax, which contributes minimally to government revenue due to low personal income levels As a result, fiscal policy in developing nations tends to be highly procyclical.
In emerging economies like Vietnam, the government adjusts its spending based on economic conditions, increasing investment and social benefits during growth periods while cutting expenditures during recessions During economic expansions, it becomes challenging for governments to reduce funding for essential sectors such as health, education, and infrastructure However, when the economy weakens, the government is forced to lower the deficit by slashing spending, particularly capital expenditures Consequently, fiscal policy plays a crucial role in reducing government spending during economic downturns.
4.2 EXAMINING THE IMPACT OF PUBLIC DEBT ON ECONOMIC
GROWTH 4.2.1 Tests of the research model
4.2.1.1 Stationary Test for Data series
To test whether Yt is stationary, Dickey – Fuller test is conducted:
At a significance level of α = 0.05, the acceptance of the null hypothesis (Ho) indicates that the time series is non-stationary, while its rejection suggests that the time series is stationary The Dickey-Fuller test was applied to the data series including EXP, GDP, IRB, USD/VND00, and LIA to determine their stationarity.
Table 4.7 Unit root test of data series (d=0) Augmented Dickey-Fuller test statitic t-Statistic Prob.*
Null Hypothesis: GDP has a unit root -2.874037 0.0529 Null Hypothesis: LNUSDVND00 has a unit root -1.026399 0.7404 Null Hypothesis: IRB has a unit root -1.748785 0.4032
Null Hypothesis: EXP has a unit root -2.317600 0.1692 Null Hypothesis: LIA has a unit root -1.534560 0.5113
The test results, with the significance level α = 0.05%, all accept the hypothesis Ho, thus the series GDP, IRB, USD/VND00, EXP and LIA all do not stop at difference d = 0
Continue to test the stationary of the series GDP, IRB, USD/VND00, EXP and LIA at the first difference:
Table 4.8 Unit root test of data series (d=1) Augmented Dickey-Fuller test statitic t-Statistic Prob.*
Null Hypothesis: GDP has a unit root -4.759976 0.0002 Null Hypothesis: LNUSDVND00 has a unit root -2.302451 0.0173 Null Hypothesis: IRB has a unit root -8.221248 0.0000
Null Hypothesis: EXP has a unit root -1.424586 0.0466 Null Hypothesis: LIA has a unit root -6.325325 0.0000
The test results with significance level α = 0.05%, all reject the hypothesis
Ho, so that the series GDP, IRB, USD/VND00, EXP and LIA stop at the first difference Thus, the data series are stopped at the first difference
Table 4.8 presents the results of the initial unit root test, revealing that the GDP, IRB, USD/VND00, EXP, and LIA series are stationary at the first difference I(1) Unit root testing is crucial for the NARDL model, as it requires stationary series at I(0) or I(1) and cannot accommodate variables at second order I(2) The presence of I(2) variables would invalidate the F-statistic of the cointegration test (Ibrahim, 2015; Ouattara, 2004) The findings confirm that no series reaches the second order, enabling the continuation of this research with the NARDL model.
The results show that at the significance level α = 0.05, p -value = 0.0065 < α, so the hypothesis Ho is rejected The model has a suitable functional form for inclusion in the regression
Specification: GDP1 GDP1(-1) GDP1(-2) EXP1_POS EXP1_NEG EXP1_NEG(-
1) IRB1_POS IRB1_NEG IRB1_NEG(-1) LIA1_POS LIA1_NEG USDVND1_POS USDVND1_NEG C
Sum of Sq df Mean Squares
Source: Regression Results 4.2.1.3 The Breusch/Pagan Test
To test the Jarque-Bera test of the residuals and the test of variance, use the Breusch/Pagan test
Table 4.10 The Breusch/Pagan test
Heteroskedasticity Test: Breusch-Pagan-Godfrey
Obs*R-squared 24.91492 Prob Chi-Square(12) 0.0152
Scaled explained SS 48.44180 Prob Chi-Square(12) 0.0000
The results obtained from the Breusch/Pagan test show that at the significance level α = 0.05, p -value = 0.0084 < α should reject the hypothesis Ho The model is not subject to variance
Table 4.11 The NARDL mode Variables constant Std Err t-values P- values
GDP1(-1) 0.181591 0.112907 1.608325 0.1124 GDP1(-2) -0.406895 0.100292 -4.057119 0.0001 EXP1_POS -7.792198 1.478342 -5.270904 0.0000 EXP1_NEG -4.044499 0.943741 -4.285600 0.0001 EXP1_NEG(-1) -3.502798 1.351912 -2.590995 0.0117 IRB1_POS 0.040734 0.123100 0.330899 0.7417 IRB1_NEG 0.169743 0.084964 1.997836 0.0497 IRB1_NEG(-1) -0.194678 0.103401 -1.882748 0.0640 LIA1_POS 0.352669 1.051407 0.335425 0.7383 LIA1_NEG -0.557014 1.071044 -0.520066 0.6047 USDVND1_POS -9.718015 9.086940 -1.069449 0.2886 USDVND1_NEG -3.628589 8.181509 -0.443511 0.6588
Source: Regression Result from Eviews10
Prior to estimating the NARDL model, a series of tests were performed, including the Ramsey test for functional specification and the Breusch/Pagan variance test The findings, as presented in Table 4.11, indicate that the NARDL model does not meet certain criteria.
97 contain any of the aforementioned flaws; hence, this study can be utilized to estimate NARDL
The F-statistic surpasses t_BDM in Table 4.12, indicating a significant long-term relationship between government debt and economic growth This finding allows for a deeper examination of the long-run connection when a nonlinear co-integration estimate is utilized.
Table 4.12 Nonlinear co-integration test Co-integrated test statistics:
Source: Regression Result from Eviews10 4.2.1.5 Short-run and long-run asymmetry testing
The asymmetry test was conducted to evaluate the nonlinear effects of government debt on economic development The results, as shown in Table 4.13, reveal a WLR of 2.034333 with a probability value of 0.0138, and a WLR of 16.74844 with a probability value of 0.000, indicating that the impact of government debt on economic growth is statistically significant in both the short and long term.
Table 4.13 Short-run and long-run asymmetry testing Test Asymmetric relationship in the long run
Asymmetric relationship in the short run
Results Asymmetrical relationship Asymmetrical relationship
Source: Regression Result from Eviews10 4.2.1.6 The Wald Test
The Wald test evaluates the asymmetric impact of government debt on economic growth According to Table 4.14, at the equilibrium level C3C5, the influence of government debt on economic growth is statistically significant, with a probability value of 0.02062, in both the short and long term.
Table 4.14 Wald test in the short run and the long run
Source: Regression Result from Eviews10
4.2.2.1 Asymmetrical impact of public debt on economic growth in the long-run
The modeling results demonstrate that economic growth can stabilize back to long-term equilibrium after experiencing short-term shocks to government debt Specifically, a one percent increase in government debt leads to a decline of 0.209970 percent in economic growth, while a one percent decrease in government debt corresponds to an increase of 1.174791 percent in economic growth.
Table 4.15 Asymmetrical impact of public debt on economic growth in the long-run Value Coef Std Err t-Statistic P
0.136620 -9.143850 0.0000 EXP1_POS** -7.849069 1.487857 -5.275420 0.0000 EXP1_NEG(-1) -7.515130 1.512799 -4.967698 0.0000 IRB1_POS** 0.066491 0.130088 0.511122 0.6109 IRB1_NEG(-1) -0.032338 0.097176 -0.332774 0.7403 LIA1_POS** -0.209970 1.054558 0.199107 0.8428 LIA1_NEG** 1.174791 1.250243 -0.939650 0.3507 USDVND1_POS** -10.80028 14.13692 -0.763977 0.4475 USDVND1_NEG** 4.574194 9.746040 0.469339 0.6403 D(GDP1(-1)) 0.415322 0.100250 4.142873 0.0001 D(EXP1_NEG) -4.022579 0.960627 -4.187452 0.0001 D(IRB1_NEG) 0.140201 0.084974 1.649934 0.1036
Source: Regression Result from Eviews10
4.2.2.2 Accumulation of residuals in the NARDL model
Figure 4.3 Plot of cumulative sum (CUSUM) residuals
Source: Regression Result from Eviews10
Figure 4.4 Plot of adjusted cumulative sum (CUSUMSQ) residuals
Source: Regression Result from Eviews10
The stability test of predicted parameters using Cusum and Cusumsq, as shown in Figures 4.3 and 4.4, confirms the statistical significance of the NARDL model The results indicate that both Cusum and Cusumsq remain within the critical lines at a 5% significance level, demonstrating that the model is stable and resilient against unexpected shocks or structural failures.
4.2.2.3 Asymmetric impact of changes in public debt on economic growth
Figure 4.5 Asymmetric cumulative dynamic multiplier graph of public debt and economic growth
Source: Regression Result from Eviews10
Figure 4.6 Asymmetric cumulative dynamic multiplier of USDVND exchange rate on economic growth
Source: Regression Result from Eviews10