The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is sensitive to the level of debt. The purpose of this paper is to address the question of non-linearity in the long-term relationship between public debt and economic growth. Specifically, the author set out to test if there exists an established “laffer curve” type relationship, where debt contributes to economic growth up to a certain point (maximal threshold) and then starts to have a negative effect on growth afterwards.
To carry out the tests, the author has used a methodology that delivers a superior test of inverse U-shapes (Lind and Mehlum, 2010), in addition to the traditional test based on a regression with a quadratic specification.
The results in the paper present evidence of a bell-shaped relationship between economic growth and total public debt in a panel of low-income Sub-Saharan African economies. This supports the hypothesis that debt has some positive contribution to economic growth in low-income countries, albeit up to a point.
The overall result supports the claim that public debt may start to be a drag on economic growth if it goes on increasing beyond the level where it would be sustainable.
This paper leads the way by implementing a robust test of non-linearity (“inverse-U” test) to the analyses the debt-growth nexus and the laffer curve in Sub-Saharan Africa.
A special gratitude goes to Danny Cassimon, Dennis Essers, Lodewijk Smets and participants of the Feb 06, 2014 IOB research seminar for their useful comments and suggestions.
Megersa, K. (2015), "The laffer curve and the debt-growth link in low-income Sub-Saharan African economies", Journal of Economic Studies, Vol. 42 No. 5, pp. 878-892. https://doi.org/10.1108/JES-06-2014-0095Download as .RIS
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