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

Eman Abdel Khalek Fseifes; Talib Mohammad Warrad

doi:doi:10.11648/j.ijber.20200902.11

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

Eman Abdel Khalek Fseifes, Talib Mohammad Warrad

Published in International Journal of Business and Economics Research (Volume 9, Issue 2)

Received: 1 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.

Published in	International Journal of Business and Economics Research (Volume 9, Issue 2)
DOI	10.11648/j.ijber.20200902.11
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), 2020. Published by Science Publishing Group

Keywords

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

References

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[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.
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APA Style

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://article.sciencepublishinggroup.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
Y1  - 2020/02/25
PY  - 2020
N1  - https://doi.org/10.11648/j.ijber.20200902.11
DO  - 10.11648/j.ijber.20200902.11
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 60
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
IS  - 2
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Author Information

Eman Abdel Khalek Fseifes

Department of Business Economics, School of Graduate Studies, University of Jordan, Amman, Jordan
Talib Mohammad Warrad

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

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APA Style

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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ACS 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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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://article.sciencepublishinggroup.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}
}

Copy | Download

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
Y1  - 2020/02/25
PY  - 2020
N1  - https://doi.org/10.11648/j.ijber.20200902.11
DO  - 10.11648/j.ijber.20200902.11
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 60
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
IS  - 2
ER  -

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