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Does Public Debt Affect Economic Growth? Panel Evidence from Central and Eastern Europe

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  • Milena Konatar
  • Jovan Đurašković
  • Julija Cerović Smolović
  • Milivoje Radović

Abstract

The paper employs a form of the panel ARDL-based error correction model (ECM) to explore the short-run and long-run relationship between public debt (and certain macroeconomic variables) and economic growth in Central and Eastern European (CEE) countries. It covers the period 2006Q1-2018Q4. The results indicate both short-term and long-term causality (except for financial development), though the marginal effects are variable-specific. There is a negative effect of public debt, interest rate and exchange rate on growth, whereas the saving rate, trade openness, financial development, fixed capital formation and population growth contribute to economic development. Thus, a responsible and saving-oriented fiscal policy, coupled with higher private sector investment, an export-oriented private sector and undervalued real exchange rate, and population growth would contribute to economic development in CEE countries.

Suggested Citation

  • Milena Konatar & Jovan Đurašković & Julija Cerović Smolović & Milivoje Radović, 2022. "Does Public Debt Affect Economic Growth? Panel Evidence from Central and Eastern Europe," Politická ekonomie, Prague University of Economics and Business, vol. 2022(5), pages 574-596.
    • Handle: RePEc:prg:jnlpol:v:2022:y:2022:i:5:id:1365:p:574-596
    DOI: 10.18267/j.polek.1365
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    More about this item

    Keywords

    Public debt; economic growth; CEE countries; ARDL-EC Model;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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