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The Macroeconomic Effects Of Government Debt On Capital Formation In The United States: An Empirical Investigation

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  • M. FAIZUL ISLAM
  • MOHAMMAD S. HASAN

Abstract

In this paper we empirically examine the effects of government debt on interest rate, price, output and capital formation in the USA during the post‐war period. Using cointegration methodology supplemented with variance decompositions and impulse response functions, the study found a long‐run equilibrium as well as a strong feedback relationship between real debt and real capital formation. The results also indicate that public debt increases inflation with adverse effects on capital formation and real output which broadly support the views of ‘monetarists’, and partially of the neo‐Ricardian economists.

Suggested Citation

  • M. Faizul Islam & Mohammad S. Hasan, 2007. "The Macroeconomic Effects Of Government Debt On Capital Formation In The United States: An Empirical Investigation," Manchester School, University of Manchester, vol. 75(5), pages 598-616, September.
    • Handle: RePEc:bla:manchs:v:75:y:2007:i:5:p:598-616
    DOI: 10.1111/j.1467-9957.2007.01032.x
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    Cited by:

    1. Debi Prasad Bal & Badri Narayan Rath, 2018. "Do Macroeconomics Channels Matter for Examining Relationship Between Public Debt and Economic Growth in India?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 121-142, December.
    2. Ranjan Kumar Mohanty & Sidheswar Panda, 2020. "How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(3), pages 253-284, August.
    3. Debi Prasad Bal & Badri Narayan Rath, 2016. "Is Public Debt a Burden for India?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 184-201, June.
    4. Xiaolin Miao, 2016. "Status analysis and control measures of the debt risk in Chinese local government: based on the study of the relationship between “power, responsibility, and interests”," China Finance and Economic Review, Springer, vol. 4(1), pages 1-19, December.
    5. Ranjan Kumar Mohanty & Sidheswar Panda, 2019. "How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach," Working Papers id:12980, eSocialSciences.
    6. Mohanty, Ranjan Kumar & Panda, Sidheswar, 2019. "How Does Public Debt affect the Indian Macroeconomy? A Structural VAR Approach," Working Papers 19/250, National Institute of Public Finance and Policy.

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