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Oct 8, 2021
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Dec 15, 2021
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Abstract
High government debts in several countries have the potential to trigger or exacerbate economic instability. These concerns are consistent with the results of this study, where countries that have a high debt ratio tend to have declining economic growth. To provide more understanding about this effect, this study tries to examine the effect of debt on economic growth by utilising the governance and public trust level as a contextual variable and mediator. Empirically, both variables have a prominent role in the debt and economic growth nexus. The debt threshold as a budgetary rule is necessary but might not be sufficient to validate the rationality of rising debt. The capability of government in providing public governance and the effect of additional debt on public trust is another crucial aspect that needs to be seriously scrutinised, or when the addition of debt becomes inevitable (such as in pandemic situation), the government should strengthen governance capability to ensure the productivity of debt and mitigate the decreased public trust. This finding implies that the debt policy should not only be based on budgetary rule but also the capacity of governance and the potential implication of the falling public trust.
Article Details
This work is licensed under a Creative Commons Attribution 4.0 International License.
How to Cite
Andar Ristabet Hesda, & Yuliani, E. (2021). Role of Governance and Public Trust on Government Debt-Economic Growth Nexus (A Global Empirical Analysis). Jurnal Ekonomi Dan Statistik Indonesia, 1(3), 113-132. https://doi.org/10.11594/jesi.01.03.01
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Rauch, J. E. (1995). Bureaucracy, infrastructure, and economic growth. American Economic Review, 85, 968–979.
Reinhart, B. C. M., & Rogoff, K. S. (2010). American Economic Association Growth in a Time of Debt. The American Economic Review, 100(2), 573–578.
Romer, D. (2012). Advanced Macroeconomics (4th ed.). Mc Graw-Hill Irwin.
Rosen, H., & Gayer, T. (2008). Public Finance. Mc Graw-Hill.
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Tarek, B. A., & Ahmed, Z. (2017). Institutional Quality and Public Debt Accumulation: An Empirical Analysis. International Economic Journal, 31(3), 415–435.
Ueshina, M. (2018). The effect of public debt on growth and welfare under the golden rule of public finance. Journal of Macroeconomics, 55, 1–11.
Wilson, R. (2016). Does Governance Cause Growth? Evidence from China. World Development, 79, 138–151.
Woo, J., & Kumar, M. S. (2015). Public Debt and Growth. Economica.
Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data (2th ed.). The MIT Press.
Yared, P. (2019). Rising government debt: Causes and solutions for a decades-old trend. Journal of Economic Perspectives, 33(2), 115–140.
Afonso, A., & Jalles, J. T. (2013). Growth and productivity: The role of government debt. International Review of Economics and Finance.
Aschauer, D. A. (2000). Public capital and economic growth: Issues of quantity, finance, and efficiency. Economic Development and Cultural Change, 48(2), 391–406.
Baum, A., Checherita-Westphal, C., & Rother, P. (2013a). Debt and growth: New evidence for the euro area. Journal of International Money and Finance, 32(1), 809–821.
Baum, A., Checherita-Westphal, C., & Rother, P. (2013b). Debt and growth: New evidence for the euro area. Journal of International Money and Finance.
Blanchard, O. (2019). Public debt and low interest rates. American Economic Review, 109(4), 1197–1229.
Brida, J. G., Gómez, D. M., & Seijas, M. N. (2017). Debt and growth: A non-parametric approach. Physica A: Statistical Mechanics and Its Applications, 486, 883–894.
Campos, J. E., Lien, D., & Pradhan, S. (2008). The Impact of Corruption on Foreign Direct Investment: Predictability Matters. The Journal of World Investment & Trade, 27(6), 1059–1067.
Checherita-Westphal, C., & Rother, P. (2011). The impact of government debt on growth an empirical investigation for the euro area. Revue Economique, 62(6), 1015–1029.
Checherita-Westphal, C., & Rother, P. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 56(7), 1392–1405.
Chen, C., Yao, S., Hu, P., & Lin, Y. (2017). Optimal government investment and public debt in an economic growth model. China Economic Review, 45, 257–278.
Chudik, A., Mohaddes, K., Pesaran, M., & Raissi, M. (2015). Is There a Debt-threshold Effect on Output Growth? IMF Working Papers, 15(197), 1.
Cuddington, J. T. (1996). Analysing the Sustainability of Fiscal Deficits in Developing Countries.
Daud, S. N. M., & Podivinsky, J. (2014). Government debt and economic growth in Malaysia: the role of institutional quality. Applied Economics Letters, 21(17), 1179–1183.
Döring, T., & Oehmke, R. D. (2019). About the Economic Psychology of Public Debt. Intereconomics, 54(5), 297–303.
Eberhardt, M., & Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics.
Égert, B. (2015). The 90% public debt threshold: the rise and fall of a stylized fact. Applied Economics, 47(34–35), 3756–3770.
Evans, P., & Rauch, J. E. (1999). Bureaucracy and growth: A cross-national analysis of the effects of “weberian” state structures on economic growth. American Sociological Review, 64(5), 748–765.
Fayissa, B., & Nsiah, C. (2013). The Impact of Governance on Economic Growth in Africa. The Journal of Developing Areas, 47(1), 91–108.
Gómez-Puig, M., & Sosvilla-Rivero, S. (2015). The causal relationship between debt and growth in EMU countries. Journal of Policy Modeling, 37(6), 974–989.
Gómez-Puig, M., & Sosvilla-Rivero, S. (2017). Heterogeneity in the debt-growth nexus: Evidence from EMU countries. International Review of Economics and Finance, 51(March), 470–486.
Guei, K. M. (2019). External Debt and Growth in Emerging Economies. International Economic Journal, 33(2), 236–251.
Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics, 114(1), 83–116.
Henri, A. O. (2019). Heavily indebted poor countries initiative (HIPC), debt relief, economic stability and economic growth in Africa. Economic Change and Restructuring, 52(2), 89–121.
Huang, C. J., & Ho, Y. H. (2017). Governance and economic growth in Asia. North American Journal of Economics and Finance, 39(100), 260–272.
Jalilian, H., Kirkpatrick, C., & Parker, D. (2007). The Impact of Regulation on Economic Growth in Developing Countries: A Cross-Country Analysis. World Development, 35(1), 87–103.
Jalles, J. T. (2011). the Impact of Democracy and Corruption on the Debt-Growth Relationship in Developing Countries. Journal of Economic Development, 36(4), 41–72.
Jensen, M. C., & Meckling, W. H. (1976). Theory of Firm: Managerial Behaviour, Agency Cost, and Ownership Structure. Journal of Financial Economics, 3, 305–360.
Kaufmann, D., Kraay, A., & Zoido-Lobatan, P. (1999). Policy Research Working Paper 2196. Governance Matters, October 1999, 60.
Kim, E., Ha, Y., & Kim, S. (2017). Public debt, corruption and sustainable economic growth. Sustainability (Switzerland), 9(3), 1–30.
Kourtellos, A., Stengos, T., & Tan, C. M. (2013). The effect of public debt on growth in multiple regimes. Journal of Macroeconomics.
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107(2), 407–437.
McKinsey. (2018). A Decade After the Global Financial Crisis: What Has (and Hasn’t) Changed? McKinsey Global Institute, September, 1–16.
OECD. (2017). Trust and Public Policy: How Better Governance Can Help Rebuild Public Trust. OECD Publishing.
Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics.
Pattillo, C., Poirson, H., & Ricci, L. (2002). External debt and growth. Finance and Development.
Rauch, J. E. (1995). Bureaucracy, infrastructure, and economic growth. American Economic Review, 85, 968–979.
Reinhart, B. C. M., & Rogoff, K. S. (2010). American Economic Association Growth in a Time of Debt. The American Economic Review, 100(2), 573–578.
Romer, D. (2012). Advanced Macroeconomics (4th ed.). Mc Graw-Hill Irwin.
Rosen, H., & Gayer, T. (2008). Public Finance. Mc Graw-Hill.
Sani, A., Said, R., Ismail, N. W., & Mazlan, N. S. (2019). Public debt, institutional quality and economic growth in sub-saharan Africa. Institutions and Economies, 11(3), 39–64.
Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1), 65.
Tarek, B. A., & Ahmed, Z. (2017). Institutional Quality and Public Debt Accumulation: An Empirical Analysis. International Economic Journal, 31(3), 415–435.
Ueshina, M. (2018). The effect of public debt on growth and welfare under the golden rule of public finance. Journal of Macroeconomics, 55, 1–11.
Wilson, R. (2016). Does Governance Cause Growth? Evidence from China. World Development, 79, 138–151.
Woo, J., & Kumar, M. S. (2015). Public Debt and Growth. Economica.
Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data (2th ed.). The MIT Press.
Yared, P. (2019). Rising government debt: Causes and solutions for a decades-old trend. Journal of Economic Perspectives, 33(2), 115–140.