International Journal of Business and Economics Research

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The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018

Received: 01 February 2020    Accepted: 17 February 2020    Published: 25 February 2020
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Abstract

At reasonable levels, public debt enhances growth and promotes welfare. However, at high levels it turns out to be detrimental. When does the effect of public debt change from good to bad? To address this question locally, this study investigates empirically the long-run relationship between public debt and economic growth in Jordan, using time series data over the period 1980 - 2018. The modeling of the debt–growth relationship is based on theoretical arguments and empirical considerations and analyzed by adopting both linear and non-linear specifications. The model is estimated by fully modified ordinary least squares (FM-OLS) approach, the empirical results confirm that public debt is negatively associated with economic growth in the long-run. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. There is an evidence of non-linearity between public debt and economic growth in the long-run, with only high levels of debt exceeding 78 percent of GDP, having a significant negative effect on growth. This result demonstrates an inverted U-shaped curve in the debt-growth relationship in Jordan, in other words, the direction of the effect of public debt on economic growth transforms smoothly from positive to negative depending on the level of indebtedness. Accordingly this study emphasizes the need to take actions not only to alleviate public debt but also to place it on a descending pathway in the long-term. As analyzing the relationship between public debt to GDP ratio and economic growth has demonstrated to be necessary for governments to shape suitable fiscal policy guiding principles. It is recommended that the government is permitted to accumulate debt to no more than 78% of GDP; otherwise it will exert a negative effect on the economy.

DOI 10.11648/j.ijber.20200902.11
Published in International Journal of Business and Economics Research (Volume 9, Issue 2, April 2020)
Page(s) 60-67
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Co-integration, Economic Growth, Public Debt, FM-OLS, Non-linearity

References
[1] Kumar, M. and Woo, J. (2010). Public Debt and Growth. IMF Working Paper 10/174.
[2] Pattillo, C. Poirson, H. and Ricci, L. (2002). External Debt and Growth. IMF Working Paper 02/69, 1-47.
[3] Egert, B. (2015), Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43: 226–238.
[4] Barro, R. (1979). On the Determination of the Public Debt. Journal of Political Economy, 87, 940-947.
[5] Martin, F. M. (2009). A positive theory of government debt. Review of economic Dynamics, 12, 608-631.
[6] Davidson, P. (2010), “Making Dollars and Sense of the US Government Debt”, Journal of Post-Keynesian Economics, vol. 32, pp. 663-667.
[7] Charles, S., Dallery, T., and Marie, J. (2015). Why the Keynesian Multiplier increases during Hard Times: A Theoretical Explanation Based on Rentiers’ Saving Behaviour. Metroeconomica, 66 (3), 451-473.
[8] Saint-Paul, G. (1992). Technological Choice, Financial Markets and Economic Development. European Economic Review, 36 (4), 763-781.
[9] Bernheim, D. B. (1989): A Neoclassical Perspective on Budget Deficit, Journal of Economic Perspectives, vol. 3, no. 2, Spring 1989, pp 55-72.
[10] Gumus, E. (2003). Crowding-Out Hypothesis versus Ricardian equivalance Proposıtıon: Evidence from Literature, Osmangazi University Journal of Social Sciences, 4 (2), 21-35.
[11] Elmendorf, D. and Mankiw, N. (1999). Government Debt. Handbook of Macroeconomics, vol. 1 Part C, 1615-1669, North-Holland.
[12] Barro, R. (1989). The Ricardian Approach to Budget Deficits. Journal of Economic Perspectives, 3 (2), 37-54.
[13] Chudik, A., Mohaddes, K. and Pesaran, M. H. (2017). Is There a Debt-Threshold Effect on Output Growth? Review of Economics and Statistics, 99 (1), 135-150.
[14] Reinhart, C. M. and Rogoff, K. S. (2010). Growth in a Time of Debt. NBER Working Paper No. 15639.
[15] Checherita, C. and Rother, P. (2010). The impact of high and growing government debt on economic growth: An empirical investigation for the Euro Area. Working Paper Series No. 1237, European Central Bank.
[16] Swamy, V. (2015). Government Debt and Economic Growth – Decomposing the Cause and Effect Relationship. Institute of Economic Growth, Delhi, Delhi, Online at http://mpra.ub.uni-muenchen.de/64105/ MPRA Paper No. 64105.
[17] Baum, A., Checherita-Westphal, C., and Rother, P. (2012). Debt and growth: New evidence for the Euro Area. Working Paper Series No. 1450, European Central Bank.
[18] Baharumshah, A. Z., Soon, S., and Lau, E. (2017). Fiscal sustainability in an emerging market economy: when does public debt turn bad? Journal of Policy Modelling, 39, 99-113.
[19] Eberhardt, M. & Presbitero, A. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics, 97, 45–58.
[20] Engle, R. F. and Granger, C. W. J.(1987). Cointegration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55, 251-276.
[21] Philips, P. C. B. and Hansen, B. E. (1990). Statistical Inference in Instrumental Variables Regressions with I (1) Processes. The Review of Economic Studies, 57, 99-125.
[22] Philips, P. C. B. (1995). Fully modified least squares and vector autoregression. Econometrica, 63 (5), 1023-1078.
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Author Information
  • Department of Business Economics, School of Graduate Studies, University of Jordan, Amman, Jordan

  • Department of Business Economics, School of Business, University of Jordan, Amman, Jordan

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    Eman Abdel Khalek Fseifes, Talib Mohammad Warrad. (2020). The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018. International Journal of Business and Economics Research, 9(2), 60-67. https://doi.org/10.11648/j.ijber.20200902.11

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    Eman Abdel Khalek Fseifes; Talib Mohammad Warrad. The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018. Int. J. Bus. Econ. Res. 2020, 9(2), 60-67. doi: 10.11648/j.ijber.20200902.11

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    AMA Style

    Eman Abdel Khalek Fseifes, Talib Mohammad Warrad. The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018. Int J Bus Econ Res. 2020;9(2):60-67. doi: 10.11648/j.ijber.20200902.11

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  • @article{10.11648/j.ijber.20200902.11,
      author = {Eman Abdel Khalek Fseifes and Talib Mohammad Warrad},
      title = {The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018},
      journal = {International Journal of Business and Economics Research},
      volume = {9},
      number = {2},
      pages = {60-67},
      doi = {10.11648/j.ijber.20200902.11},
      url = {https://doi.org/10.11648/j.ijber.20200902.11},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.ijber.20200902.11},
      abstract = {At reasonable levels, public debt enhances growth and promotes welfare. However, at high levels it turns out to be detrimental. When does the effect of public debt change from good to bad? To address this question locally, this study investigates empirically the long-run relationship between public debt and economic growth in Jordan, using time series data over the period 1980 - 2018. The modeling of the debt–growth relationship is based on theoretical arguments and empirical considerations and analyzed by adopting both linear and non-linear specifications. The model is estimated by fully modified ordinary least squares (FM-OLS) approach, the empirical results confirm that public debt is negatively associated with economic growth in the long-run. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. There is an evidence of non-linearity between public debt and economic growth in the long-run, with only high levels of debt exceeding 78 percent of GDP, having a significant negative effect on growth. This result demonstrates an inverted U-shaped curve in the debt-growth relationship in Jordan, in other words, the direction of the effect of public debt on economic growth transforms smoothly from positive to negative depending on the level of indebtedness. Accordingly this study emphasizes the need to take actions not only to alleviate public debt but also to place it on a descending pathway in the long-term. As analyzing the relationship between public debt to GDP ratio and economic growth has demonstrated to be necessary for governments to shape suitable fiscal policy guiding principles. It is recommended that the government is permitted to accumulate debt to no more than 78% of GDP; otherwise it will exert a negative effect on the economy.},
     year = {2020}
    }
    

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  • TY  - JOUR
    T1  - The Nonlinear Effect of Public Debt on Economic Growth in Jordan over the Period 1980 - 2018
    AU  - Eman Abdel Khalek Fseifes
    AU  - Talib Mohammad Warrad
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    JF  - International Journal of Business and Economics Research
    JO  - International Journal of Business and Economics Research
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    EP  - 67
    PB  - Science Publishing Group
    SN  - 2328-756X
    UR  - https://doi.org/10.11648/j.ijber.20200902.11
    AB  - At reasonable levels, public debt enhances growth and promotes welfare. However, at high levels it turns out to be detrimental. When does the effect of public debt change from good to bad? To address this question locally, this study investigates empirically the long-run relationship between public debt and economic growth in Jordan, using time series data over the period 1980 - 2018. The modeling of the debt–growth relationship is based on theoretical arguments and empirical considerations and analyzed by adopting both linear and non-linear specifications. The model is estimated by fully modified ordinary least squares (FM-OLS) approach, the empirical results confirm that public debt is negatively associated with economic growth in the long-run. On the other hand, investment, labor force growth, and openness of trade are found to be positively associated with economic growth in the long-run. There is an evidence of non-linearity between public debt and economic growth in the long-run, with only high levels of debt exceeding 78 percent of GDP, having a significant negative effect on growth. This result demonstrates an inverted U-shaped curve in the debt-growth relationship in Jordan, in other words, the direction of the effect of public debt on economic growth transforms smoothly from positive to negative depending on the level of indebtedness. Accordingly this study emphasizes the need to take actions not only to alleviate public debt but also to place it on a descending pathway in the long-term. As analyzing the relationship between public debt to GDP ratio and economic growth has demonstrated to be necessary for governments to shape suitable fiscal policy guiding principles. It is recommended that the government is permitted to accumulate debt to no more than 78% of GDP; otherwise it will exert a negative effect on the economy.
    VL  - 9
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