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THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND PUBLIC DEBT: A THRESHOLD REGRESSION APPROACH IN GHANA

Year 2022, Volume: 11 Issue: 1, 15 - 23, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1549

Abstract

Purpose– Ghana’s debt stock has been a subject of debate for a very long time. This study is to estimate the debt threshold level above which
it will be detrimental to economic growth.
Methodology– The study used a threshold autoregressive model introduced by Tong (1978) and Hansen (1996). The study employed timeseries data for thirty-one years from 1990 to 2020. Economic growth was measured by the Gross Domestic Product Per Capita (GDPPC). The
study sought to answer the following question: What is Ghana's public debt threshold value?
Findings– The data reveal that Ghana has a single public debt threshold value (i.e., structural breakpoint), implying that public debt and
growth are not linear. The derived threshold regression model indicates a public debt threshold of 57.09 per cent, above which the growth
rate of GDPPC is considerably retarded. In addition, below the threshold level, there is a statistically significant positive association between
public debt and growth.
Conclusion– This article concludes that low public debt is growth-enhancing, whereas public debt above the threshold value is detrimental
to economic growth. Therefore, policymakers should focus on monetary policies that aid in maintaining public debt at a low level. However,
this study makes the following recommendations to help sustain Ghana's expanding state debt:
To begin with, the government should halt the accumulation of external debt, which incurs additional costs during periods of currency
depreciation. Second, policymakers with decision-making authority should exert severe restraint on the growing cedi. Thirdly, the
government should eliminate all wasteful spending. Finally, the government of Ghana should allocate its external debt appropriately for
economic investment and maintain a strong debt management policy.

References

  • Alam, I. (2019). Impact of debt threshold level on GDP per capita growth: evidence of G7 advanced countries. International Journal of Science, Technology and Society, 7(5), 74-84. https://doi.org/10.11648/j.ijsts.20190705.11
  • Awadzie, D. M. (2020). Impact of Debt Threshold Level on Financial Performance of Listed Firms on Ghana Stock Exchange. International Journal of Business Management and Economic Review, 3(06), 2581–4664. https://doi.org/http://doi.org/10.35409/IJBMER.2020.3222
  • Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(6), 1095–1117. https://doi.org/10.1086/260266
  • Bose, B. (2002), “Inflation, the credit market, and economic growth,” Oxford Economic Papers, 54, 412-34.
  • Chudik, A., Mohaddes, K., Pesaran, M. H., & Raissi, M. (2017). Is there a debt-threshold effect on output growth? Review of Economics and Statistics, 99(1), 135–150. https://doi.org/10.1162/REST_a_00593
  • D. W. Elmendorf and N. G. Mankiw, "Government Debt," Handbook of Macroeconomics, vol. 1, no. 3, pp. 1615-1669, 1999.
  • Getinet, B., & Ersumo, F. (2020). The Impact of Public External Debt on Economic Growth in Ethiopia: The ARDL Approach to Co-integration. Journal of Economics and Sustainable Development, 11(11), 25–39. https://doi.org/10.7176/jesd/11-11-03
  • Guraziu et al. (2012): “Sovereign Debt Crisis and Its Impact on World Markets”, IBDE Report, pages 21-22
  • Hansen, B. “Inference when a Nuisance Parameters Is not Identified under the Null Hypothesis”. Econometrica 64, no. 2 (1996): 413–30.
  • Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of econometrics, 93(2), 345-368.
  • Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575- 603.
  • Manmohan S, Kumar, & Woo, J. (2010). Public Debt and Growth. IMF Working Paper, WP/10/174.
  • Lee, C., & Wong, S. Y. (2005). Inflationary Threshold Effects in the Relationship between Financial Development and Economic Growth: Evidence from Taiwan and Japan. Journal of Economic Development, 30(1), 49–70.
  • Lici, E., & Dika, I. (2016). the Relationship Between Economic Growth and Public Debt : a Survey of the Empirical Literature. IV(9), 265–272.
  • Munir, Q., Mansur, K., & Furuoka, F. (2009). Inflation and Economic Growth in Malaysia — A Threshold Regression Approach. ASEAN Economic Bulletin, 26(2), 180. https://doi.org/10.1355/ae26-2d
  • Olusegun, E. A., Olufemi, A. S., & Olubunmi, E. O. (2020). The Impact Of External Debt On Economic Growth In Nigeria. International Journal of Scientific and Research Publications (IJSRP), 10(4), p10077. https://doi.org/10.29322/ijsrp.10.04.2020.p10077
  • Pattillo, C., Poirson, H., & Ricci, L. (2002). External Debt and Growth (pp. 32-35). IMF Working Paper 02/69, Washington DC: IMF. https://doi.org/10.5089/9781451849073.001
  • Pattillo, C., H. Poirson, and L. Ricci, (2004). “What are the Channels through which External Debt Affects Growth?” IMF Working Paper No. 04/15 (Washington: International Monetary Fund).
  • Sarel, M. (1996). Non-linear effects of inflation on economic growth. Working Paper No. 95/56, Vol. 43, No. 1. (Washington, DC: International Monetary Fund).
  • Sepehri A., Moshiri, S. (2004). Inflation-growth profiles across countries: evidence from developing and developed countries, International Review of Applied Economics, 18(2): 191–207.
  • Tong, H. (1978), “On a threshold model: Pattern recognition and signal processing,” Amsterdam: Sijthoff and Noordhoff, 101-41
Year 2022, Volume: 11 Issue: 1, 15 - 23, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1549

Abstract

References

  • Alam, I. (2019). Impact of debt threshold level on GDP per capita growth: evidence of G7 advanced countries. International Journal of Science, Technology and Society, 7(5), 74-84. https://doi.org/10.11648/j.ijsts.20190705.11
  • Awadzie, D. M. (2020). Impact of Debt Threshold Level on Financial Performance of Listed Firms on Ghana Stock Exchange. International Journal of Business Management and Economic Review, 3(06), 2581–4664. https://doi.org/http://doi.org/10.35409/IJBMER.2020.3222
  • Barro, R. J. (1974). Are government bonds net wealth? Journal of Political Economy, 82(6), 1095–1117. https://doi.org/10.1086/260266
  • Bose, B. (2002), “Inflation, the credit market, and economic growth,” Oxford Economic Papers, 54, 412-34.
  • Chudik, A., Mohaddes, K., Pesaran, M. H., & Raissi, M. (2017). Is there a debt-threshold effect on output growth? Review of Economics and Statistics, 99(1), 135–150. https://doi.org/10.1162/REST_a_00593
  • D. W. Elmendorf and N. G. Mankiw, "Government Debt," Handbook of Macroeconomics, vol. 1, no. 3, pp. 1615-1669, 1999.
  • Getinet, B., & Ersumo, F. (2020). The Impact of Public External Debt on Economic Growth in Ethiopia: The ARDL Approach to Co-integration. Journal of Economics and Sustainable Development, 11(11), 25–39. https://doi.org/10.7176/jesd/11-11-03
  • Guraziu et al. (2012): “Sovereign Debt Crisis and Its Impact on World Markets”, IBDE Report, pages 21-22
  • Hansen, B. “Inference when a Nuisance Parameters Is not Identified under the Null Hypothesis”. Econometrica 64, no. 2 (1996): 413–30.
  • Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of econometrics, 93(2), 345-368.
  • Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68(3), 575- 603.
  • Manmohan S, Kumar, & Woo, J. (2010). Public Debt and Growth. IMF Working Paper, WP/10/174.
  • Lee, C., & Wong, S. Y. (2005). Inflationary Threshold Effects in the Relationship between Financial Development and Economic Growth: Evidence from Taiwan and Japan. Journal of Economic Development, 30(1), 49–70.
  • Lici, E., & Dika, I. (2016). the Relationship Between Economic Growth and Public Debt : a Survey of the Empirical Literature. IV(9), 265–272.
  • Munir, Q., Mansur, K., & Furuoka, F. (2009). Inflation and Economic Growth in Malaysia — A Threshold Regression Approach. ASEAN Economic Bulletin, 26(2), 180. https://doi.org/10.1355/ae26-2d
  • Olusegun, E. A., Olufemi, A. S., & Olubunmi, E. O. (2020). The Impact Of External Debt On Economic Growth In Nigeria. International Journal of Scientific and Research Publications (IJSRP), 10(4), p10077. https://doi.org/10.29322/ijsrp.10.04.2020.p10077
  • Pattillo, C., Poirson, H., & Ricci, L. (2002). External Debt and Growth (pp. 32-35). IMF Working Paper 02/69, Washington DC: IMF. https://doi.org/10.5089/9781451849073.001
  • Pattillo, C., H. Poirson, and L. Ricci, (2004). “What are the Channels through which External Debt Affects Growth?” IMF Working Paper No. 04/15 (Washington: International Monetary Fund).
  • Sarel, M. (1996). Non-linear effects of inflation on economic growth. Working Paper No. 95/56, Vol. 43, No. 1. (Washington, DC: International Monetary Fund).
  • Sepehri A., Moshiri, S. (2004). Inflation-growth profiles across countries: evidence from developing and developed countries, International Review of Applied Economics, 18(2): 191–207.
  • Tong, H. (1978), “On a threshold model: Pattern recognition and signal processing,” Amsterdam: Sijthoff and Noordhoff, 101-41
There are 21 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

David Mensah Awadzıe This is me 0000-0001-5532-2152

David Kwashie Garr This is me 0000-0003-1241-4422

Thomas Dodzi Tsoekeku This is me 0000-0002-5728-8581

Publication Date March 30, 2022
Published in Issue Year 2022 Volume: 11 Issue: 1

Cite

APA Awadzıe, D. M., Garr, D. K., & Tsoekeku, T. D. (2022). THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND PUBLIC DEBT: A THRESHOLD REGRESSION APPROACH IN GHANA. Journal of Business Economics and Finance, 11(1), 15-23. https://doi.org/10.17261/Pressacademia.2022.1549

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