IS THE CROWD-OUT EFFECT APPLICABLE BETWEEN PUBLIC DEBT AND PUBLIC INVESTMENT IN THE EUROZONE? EVIDENCE FROM A CS-ARDL ANALYSIS

Abstract

The primary purpose of this study is to explore the effects of public debt on public investment within the Eurozone, focusing on 20 member countries over the period 2000–2023. While the relationship between government borrowing and investment activity has been widely debated, empirical evidence specific to the Euro Area remains relatively limited. To address this gap, the study employs the Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) approach, which offers the advantage of accounting for cross-sectional dependence and slope heterogeneity across countries. This methodology enables the derivation of both short-run and long-run dynamics of the debt–investment nexus. The empirical results consistently demonstrate a negative and statistically significant association between public debt levels and public investment, indicating that rising debt burdens exert a crowding-out effect on public sector capital formation.

Keywords

• Public Debt
• Public Investment
• CS-ARDL.

AVRO BÖLGESİ’NDE KAMU BORCU İLE KAMU YATIRIMI ARASINDA DIŞLAMA ETKİSİ GEÇERLİ MİDİR? CS-ARDL ANALİZİNDEN ELDE EDİLEN KANITLAR

Abstract

Bu çalışmanın temel amacı, 20 üye ülkeye odaklanarak 2000-2023 döneminde Avro Bölgesi'nde kamu borcunun kamu yatırımları üzerindeki etkilerini araştırmaktır. Hükümet borçlanması ile yatırım faaliyeti arasındaki ilişki yaygın olarak tartışılmış olsada, Avro Bölgesi'ne özgü ampirik kanıtlar nispeten sınırlıdır. Bu boşluğu gidermek için çalışma, ülkeler arasında yatay kesit bağımlılığını ve eğim heterojenliğini hesaba katma avantajı sunan Kesitsel Otoregresif Dağıtılmış Gecikme (CS-ARDL) yaklaşımını kullanmaktadır. Bu metodoloji, borç-yatırım ilişkisinin hem kısa hem de uzun vadeli dinamiklerinin türetilmesini sağlar. Ampirik sonuçlar, kamu borç seviyeleri ile kamu yatırımı arasında sürekli olarak negatif ve istatistiksel olarak anlamlı bir ilişki olduğunu göstermekte ve artan borç yüklerinin kamu sektörü sermaye oluşumu üzerinde dışlama etkisi yarattığını göstermektedir.

Keywords

• Kamu Borcu
• Kamu Yatırımı
• CS-ARDL.

References

1. Baaziz, Y. (2015). Does public debt matter for economic growth? Evidence from South Africa. Journal of Applied Business Research, 31(6), 2187–2196.
2. Bacchiocchi, E., Borghi, E., Missale, A. (2011). Public Investment under Fiscal Constraints. Fiscal Studies, 32(1), 11–42. https://doi.org/10.1111/j.1475-5890.2011.00126.x
3. Bai, J., & Ng, S. (2004). A panic attack on unit roots and cointegration. Econometrica, 72(4), 1127-1177.
4. Baltagi, B. H., & Hashem Pesaran, M. (2007). Heterogeneity and cross section dependence in panel data models: theory and applications introduction. Journal of Applied Econometrics, 22(2), 229-232.
5. Biza, R. A., Kapingura, F. M., & Tsegaye, A. (2013). Do budget deficit crowd out private investment? An analysis of the South African economy. Paper presented at the Financial Globalisation and Sustainable Finance: Implications for Policy and Practice, Cape Town. Bonga, W. G., Chirowa, F., & Nyamapfeni, N. (2015). Growth–debt nexus: An examination of public debt levels and debt crisis in Zimbabwe. Journal of Economics and Finance, 6(2), 09–14.
6. Breuer, J. B., McNown, R., & Wallace, M. (2002). Series-specific unit root tests with panel data. Oxford Bulletin of Economics and Statistics, 64(5), 527-546.
7. Carrion-i-Silvestre, Josep Lluis, 2005. "Health care expenditure and GDP: Are they broken stationary?," Journal of Health Economics, Elsevier, vol. 24(5), pages 839-854, September.
8. Cecchetti, S. G., Mohanty, M., Zampolli, F. (2011). Achieving Growth amid Fiscal Imbalances: The Real Effects of Debt. Economic Symposium Conference Proceedings, 352(8), 145–196.

9. Checherita, C., & Rother, P. (2010). The impact of high and growing public debt economic growth: An empirical investigation for the Euro Area. Journal of European Economic Review, 56(4), 1392–1405. doi:10.1016/j. euroecorev.2012.06.007
10. Chudik, A., Pesaran, M. H. (2015). Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors. Journal of Econometrics, 188(2), 393–420. https://doi.org/10.1016/j.jeconom.2015.03.007
11. Churchman, N. (2001). David Ricardo on public debt (Firsted.). UK: Palgrave Macmillan, Studies in history of Economics.
12. Cohen, D. (1993). Low investment and large LDC debt in the 1980s. American Economy Review, 83(2), 437–449.
13. De Haan, J., Sturm, J. E., Sikken, B. J. (1996). Government Capital Formation: Explaining the Decline. Weltwirtschaftliches Archiv, 132(1), 55–74. https://doi.org/10.1007/BF02707902
14. De Mendonça, H. F., Brito, Y. (2021). The Link between Public Debt and Investment: An Empirical Assessment from Emerging Markets. Applied Economics, 53(50), 5864–5876. https://doi.org/10.1080/00036846.2021.1931008
15. Deshpande, A. (1997). The Debt Overhang and the Disincentive to Invest. Journal of Development Economics, 52, 169–187. https://doi.org/10.1016/S0304-3878(96)00435-X
16. Duru, I. U., Okorontah, C. F., Danjuma, I., Nwamuo, C., Promise, U. K., & Favour, O. T. (2023). Does public debt disrupt economic growth in Nigeria? A two-stage least squares approach. Economy, 10(1), 39-49.
17. Elmendorf, D. W., Mankiw, N. G. (1999). Government Debt. In: Taylor, J. B., Woodford, M. (eds.), Handbook of Macroeconomics, Vol. 1, 1615–1669. Amsterdam: Elsevier Science B.V. Source: https://doi.org/10.1016/S1574-0048(99)10038-7
18. Fincke, B., Greiner, A. (2015). Public Debt and Economic Growth in Emerging Market Economies. South African Journal of Economics, 83(3), 357–370. https://doi.org/10.1111/saje.12079
19. Greiner, A. (2013). Sustainable public debt and economic growth under wage rigidity. Metroeconomica, 64(4), 272–292. doi:10.1111/meca.12006
20. Heinemann, F. (2006). Factor Mobility, Government Debt and the Decline in Public Investment. International Economics and Economic Policy, 3, 11–26. https://doi.org/10.1007/s10368-005-0043-z
21. Kamudia, S. (2015). The effects of public debt on private investment and economic growth in Kenya (1980– 2013). Thesis
22. Kibet, K. S. (2013). Effects of budget deficit and corruption on private investment in developing countries: A panel data analysis. African Journal of Business Management, 7(27), 2720–2732.
23. Konatar, M., Đurašković, J., Popović, N., & Radović, M. (2025). Does Public Debt Crowd Out Public Investment in Central and Eastern European economies? A Dynamic Approach Using CS-ARDL. Prague Economic Papers, 34(1), 26-44.
24. Kostarakos, I. (2021). Public Debt and Aggregate Investment in the EU. Applied Economics Letters, 29(15), 1358–1364. https://doi.org/10.1080/13504851.2021.1931655
25. Kourtellos, A., Stengos, T., & Tan, C. M. (2013). The effectof public debt on growth in multiple regimes. Journal of Macroeconomics, 38(8), 35–43. doi:10.1016/j.jmacro.2013.08.023
26. Makin, A. J. (2015). Has excessive public debt slowed world growth? Economics, 16(4), 1–17. Medeiros, O. L., Cabral, R. S. V., Baghdassarian, W., & Almeida, M. A. (2005). Public debt strategic planning and benchmark composition. Brazil: National Treasury Secretariat, Ministry of Finance.Pascal, E. C. (2012). Public debt management. UNESCOEOLSS Encyclopedia, ref. 6. 28.39.EOLSS.
27. Modgliani, F. (1961). Long run implications of alternative fiscal policies and the burden of national debt. Economic Journal, 71, 730–755. doi:10.2307/2228247
28. Mohanty, A. R., & Mishra, B. R. (2016). Impact of public debt on economic growth: Evidence from Indian states. Vilakshan, XIMB Journal of Management, 13(6), 1–21.
29. Mongale, I. P., Petersen, J. M., Meniago, C., & Petersen, M. A. (2013). Household savings in South Africa: An econometric analysis. Mediterranean Journal of Social Sciences, 4(2), 519–530.
30. Ncanywa, T., & Masoga, M. M. (2018). Can public debt stimulate public investment and economic growth in South Africa?. Cogent Economics & Finance, 6(1), 1516483.
31. Otieno, B. A., & Dániel, K. (2025). Foreign public debt and regional economic growth: A systematic literature review and research Agenda. Research in Globalization, 100304.
32. Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41(2), 21–41. doi:10.1016/j. jmacro.2014.03.009
33. Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967-1012.
34. Pesaran, M. H. (2015). Testing Weak Cross-sectional Dependence in Large Panels. Econometric Reviews, 34(6–10), 1089–1117. https://doi.org/10.1080/07474938.2014.956623.
35. Pesaran, M. H., Yamagata, T. (2008). Testing Slope Homogeneity in Large Panels. Journal of Econometrics, 142(1), 50–93. https://doi.org/10.1016/j.jeconom.2007.05.010
36. Picarelli, M. O., Vanlaer, W., Marneffe, W. (2019). Does Public Debt Produce a Crowding Out Effect for Public Investment in the EU? European Stability Mechanism Working Paper, No. 36. https://doi.org/10.2139/ssrn.3376471
37. Qudah, A. M. (2016). Public debt, external debt and economic growth of Jordan. International Journal of Research in Commerce and Management, 7(4), 11–16.
38. Reinhart, C. M., & Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573–578. doi:10.1257/aer.100.2.573
39. Saint-Paul, G. (1992). Fiscal policy in an endogenous growth model. The Quarterly Journal of Economics, 107(4), 1243–1259. doi:10.2307/2118387
40. Salotti, S., Trecroci, C. (2016). The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth. Economica, 83(330), 356–384. https://doi.org/10.1111/ecca.12175
41. Sanchez-Juarez, I., & Garcia-Almada, R. (2016). Public debt, public investment and economic growth in Mexico. International Journal of Financial Studies, 4 (6), 1–14. doi:10.3390/ijfs4020006
42. Say, J. B. (1880). A treatise on political economy on the production, distribution and consumption of wealth. (C. R. Prnsep, Ed). Philadelphia: Claxton, Remsen and Haffelfinger.
43. P.A.V.B. Swamy, Efficient inference in a random coefficient regression model, Econometrica 38 (2) (1970) 311e323.
44. Tabengwa, G. K. (2014). Impact of shocks to public debt and government expenditure on human capital and growth in developing countries. Journal of Economics and Behavioural Studies, 6(1), 44–67.
45. Taylor, M. P., & Sarno, L. (1998). The behavior of real exchange rates during the postbrettonwoods period. Journal of International Economics, 46(2), 281-312.
46. Turrini, A. (2004). Public Investment and the EU Fiscal Framework. Report, No. 202, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, Brussels.
47. Valila, T., Mehrotra, A. (2005). Evolution and Determinants of Public Investment in Europe. European Investment Bank Economic and Financial Report, 01.
48. Woo, J., Kumar, M. S. (2015). Public Debt and Growth. Economica, 82(328), 705–739. https://doi.org/10.1111/ecca.12138