A two-edged sword: The impact of public debt on economic growth-the case of Ethiopia

Yime , Addis; Alemayehu Geda Fole
A icle
A wo-edged swo d: The impac o public deb on
economic g ow h- he case o E hiopia
Jou nal o Applied Economics
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Sugges ed Ci a ion: Yime , Addis; Alemayehu Geda Fole (2024) : A wo-edged swo d: The impac
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A wo-edged swo d: he impac o public deb on
economic g ow h— he case o E hiopia
Addis Yime & Alemayehu Geda
To ci e his a icle: Addis Yime & Alemayehu Geda (2024) A wo-edged swo d: he impac o
public deb on economic g ow h— he case o E hiopia, Jou nal o Applied Economics, 27:1,
2398908, DOI: 10.1080/15140326.2024.2398908
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© 2024 The Au ho (s). Published by In o ma
UK Limi ed, ading as Taylo & F ancis
G oup.
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RESEARCH ARTICLE
A wo-edged swo d: he impac o public deb on economic
g ow h— he case o E hiopia
Addis Yime
a
and Alemayehu Geda
b,c,d
a
Global Resea ch and E alua ion Specialis , Global Resea ch and E alua ion Uni , Sa e he Child en
In e na ional, Addis Ababa, E hiopia;
b
Depa men o Economics, Addis Ababa Uni e si y, Addis Ababa,
E hiopia;
c
Depa men o Economics, Bahi Da Uni e si y, Bahi Da , E hiopia;
d
A ican Expo and Impo
Bank (A eximbank), Cai o, Egyp
ABSTRACT
This s udy in es iga es he dynamic e ec s o public deb on eco-
nomic g ow h in E hiopia using annual da a om 1980 o 2021. The
esul s om he Au o eg essi e Dis ibu ed Lag (ARDL) modeling
app oach e eal ha while public deb boos s in es men and
enhances g ow h in he sho e m, i hinde s long- e m g ow h.
Addi ionally, deb se icing nega i ely impac s g ow h in bo h he
sho and long e m by di e ing i al esou ces om in es men .
Thus, public deb ac s as a wo-edged swo d o E hiopia’s eco-
nomic g ow h. On one side, i inances in as uc u e and o he
g ow h-s imula ing p ojec s; on he o he , high deb le els can
impede g ow h. To mi iga e he ad e se impac s o public deb ,
E hiopia should implemen p uden iscal discipline, mobilize
domes ic e enue, manage deb e icien ly, add ess i s s uc u al
ade de ici , and p io i ize needs o p e en misuse and co up ion.
This app oach should also p io i ize social spending and public
in es men while s a egically ansi ioning om deb
dependence.
ARTICLE HISTORY
Recei ed 21 Decembe 2023
Accep ed 26 Augus 2024
KEYWORDS
Public deb ; Impac ;
economic g ow h; E hiopia
Deb is a wo-edged swo d. Used wisely and in mode a ion, i clea ly imp o es wel a e. Bu ,
when i is used imp uden ly and in excess, he esul can be disas e . Fo a coun y, oo much
deb impai s he go e nmen ’s abili y o deli e essen ial se ices o i s ci izens.
Cecche i e al. (2011)
1. In oduc ion
Public deb can ha e bo h posi i e and nega i e e ec s on economic g ow h, depending
on how i is used and managed. On he posi i e side, public deb can be used o inance
in es men s in in as uc u e, educa ion, and heal hca e, which can con ibu e o long-
e m economic g ow h. Fo example, in es men s in anspo a ion in as uc u e can
enhance he p oduc i i y o businesses and educe anspo a ion cos s, while
CONTACT Addis Yime [email p o ec ed] Global Resea ch and E alua ion Specialis , Global Resea ch and
E alua ion Uni , Sa e he Child en In e na ional, Addis Ababa, E hiopia
JOURNAL OF APPLIED ECONOMICS
2024, VOL. 27, NO. 1, 2398908
h ps://doi.o g/10.1080/15140326.2024.2398908
© 2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup.
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/
licenses/by/4.0/), which pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly
ci ed. The e ms on which his a icle has been published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o
wi h hei consen .
in es men s in educa ion and heal hca e can imp o e he quali y o he wo k o ce and
lowe heal hca e cos s.
Howe e , public deb can also bu den he economy, as i equi es a signi ican po ion
o he go e nmen ’s e enue o be alloca ed owa ds in e es paymen s. This, in u n, can
diminish he amoun o unding a ailable o o he c ucial sec o s, such as educa ion,
heal hca e, and in as uc u e. Thus, i public deb is no managed p ope ly, i can ha e
nega i e e ec s on economic g ow h. Fo ins ance, s udies ha e ound ha public deb
nega i ely impac s g ow h by c owding ou p i a e in es men s (see, e.g., Panizza &
P esbi e o, 2013; Reinha & Rogo , 2010; Woo & Kuma , 2015). I can also lead o an
inc ease in he cos o bo owing o p i a e businesses (see, e.g., Cecche i e al., 2011;
Clemen s e al., 2003; Pa illo e al., 2006; Woo & Kuma , 2015). In addi ion, high le els o
public deb can lead o in la ion, cu ency dep ecia ion (de alua ion), and o he mac o-
economic ulne abili ies, which can ha e a nega i e impac on he economy (see, e.g.,
Woo & Kuma , 2015). P i a e in es men could also be ad e sely a ec ed by he “deb
o e hang” p oblem i economic agen s expec high public deb o mean u u e high axes
(Pa illo e al., 2006).
In he case o E hiopia, he coun y’s public deb is accumula ing in la ge amoun s due
o inc easing inancing needs, bo h domes ic and ex e nal shocks, and s uc u al mac o-
economic imbalances. In ecen yea s, he deb - o-GDP a io has eached 50.7% in 2021.
This eached as high as 60% in 2018. While some o his deb has been used o inance
in as uc u e and o he i al p ojec s, he e a e conce ns abou he sus ainabili y o he
deb and i s po en ial nega i e impac on economic g ow h. Bad go e nance, na u al
disas e s, and eme gencies such as con lic s, he clima e c isis, and he COVID-19
pandemic u he exace ba e he inc easing public deb and he challenge o se icing
i . The g owing accumula ion o deb could become unsus ainable, esul ing in di icul-
ies wi h deb epaymen and hinde ing g ow h, as well as impeding he achie emen o
o he de elopmen goals.
Unde s anding he pa hways and na u e o he ela ionship be ween public deb and
economic g ow h in E hiopia is mo e c ucial han e e . This is pa icula ly ue as he
go e nmen in ensi ies i s e o s o ans o m he coun y in o a middle-income na ion
by 2030. This ans o ma ion equi es a sus ainable me hod o inancing i s ambi ions.
This is because he causal ela ionship be ween so e eign deb a iables and economic
g ow h has di ec policy implica ions, pa icula ly on ax and in es men choices – and
consequen ly on economic g ow h (see Gómez-Puig & Sos illa-Ri e o, 2015, 2018).
The e o e, i is impo an o policymake s o ca e ully analyze he ela ionship
be ween deb and economic g ow h and ake measu es o manage he deb in
a sus ainable manne . This may include implemen ing iscal e o ms, inc easing e enue
gene a ion, and imp o ing deb managemen p ac ices. By doing so, E hiopia can ensu e
ha public deb is e ec i ely u ilized o p omo e long- e m economic g ow h and
de elopmen .
While nume ous s udies ha e examined he impac o public deb on economic
g ow h in gene al (see, e.g., D’And ea, 2022; de Soy es e al., 2022; Donay e & Tai an,
2017; Ewaida, 2017; Gómez-Puig e al., 2022; Huang e al., 2018; Mohsin e al., 2021),
li le has been done, howe e , o in es iga e his ela ionship in E hiopia. This is con-
sis en wi h he pauci y o li e a u e on he subjec in A ica in gene al. In addi ion, he
ela ionship be ween deb and economic g ow h is speci ic o each coun y and ime
2A. YIMER AND A. GEDA
pe iod. The e o e, i is c ucial o analyze he speci ic impac o public deb on economic
g ow h in e e y coun y, including E hiopia. While he ew a ailable coun y-case s udies
on E hiopia p o ide aluable insigh s in o he ela ionship be ween deb and g ow h in
he coun y, hei p ima y ocus is on de e mining whe he deb impac s g ow h in
E hiopia. Howe e , hey ail o add ess he policy- ele an ques ion o how deb a ec s
g ow h in he coun y, speci ically he mechanisms h ough which deb a ec s g ow h.
They also p edominan ly ocused on he g ow h impac o he ex e nal componen o
public deb , dis ega ding he ac ha domes ic (o in e nal) deb cons i u es app oxi-
ma ely hal o he o al public deb . Fu he mo e, hey also su e om me hodological
and da a- ela ed p oblems (see, e.g., Alani, 2020; Geb ekidan, 2023; Ge ine & E sumo,
2020).
Thus, his s udy complemen s p e ious esea ch on E hiopia and aims o add ess
some o he gaps in he exis ing li e a u e by conduc ing a comp ehensi e analysis o he
ela ionship be ween deb and economic g ow h. The s udy examines he sho - and
long- e m impac s o public deb on economic g ow h using a combina ion o heo e ical
app oaches. Speci ically, i ocuses on analyzing he “c owding ou ” and “deb o e hang”
hypo heses. Based on his app oach, he s udy aims o answe he ollowing esea ch
ques ions: a) Does E hiopia’s public deb ha e any e ec on he coun y’s economic
g ow h? b) I so, is he in es men channel impo an ? and c) How does his in luence
a y in he sho un and he long un? Using annual da a om 1980 o 2021, he s udy
employs he au o eg essi e dis ibu i e lag (ARDL) modeling app oach o add ess hese
ques ions.
This s udy makes h ee majo con ibu ions o he li e a u e on he deb -
g ow h nexus. Fi s , i comp ehensi ely in es iga es he dynamic e ec s o public
deb on economic g ow h in E hiopia om 1980 o 2021 using he Au o eg essi e
Dis ibu ed Lag (ARDL) modeling app oach. Unlike p e ious s udies, his esea ch
dis inguishes be ween he sho - e m and long- e m impac s o public deb on
economic g ow h, showing ha public deb can enhance g ow h in he sho e m
while hinde ing i in he long e m. Addi ionally, his s udy in eg a es he e ec s
o deb se icing on economic g ow h, o e ing a holis ic iew o public deb
dynamics and e ealing how deb se icing exace ba es nega i e g ow h impac s
by di e ing esou ces om c i ical in es men a eas. Second, he s udy con i-
bu es a no el policy-o ien ed analysis, o e ing ailo ed ecommenda ions o
E hiopia’s economic amewo k. Resea che s, policymake s, and economic analys s
can bene i om hese esul s: esea che s gain a de ailed case s udy o compa a-
i e analyses wi h o he de eloping coun ies, policymake s can use he insigh s o
design be e iscal and deb managemen policies, and economic analys s can
o ecas economic ends and ad ise on sus ainable deb p ac ices. Fo example,
he indings highligh he dual ole o public deb as bo h a ca alys o sho - e m
in es men -d i en g ow h and a hind ance o long- e m economic s abili y due o
deb se icing bu dens. By emphasizing he impo ance o p uden iscal disci-
pline, domes ic e enue mobiliza ion, e icien deb managemen o p e en mis-
use and co up ion, and imp o ed p io i iza ion o in es men needs, along wi h
he c i ical impo ance o add essing he coun y’s s uc u al ade de ici , his
esea ch p o ides ac ionable insigh s speci ically designed o add ess E hiopia’s
unique economic challenges. Las ly, he s udy’s single-coun y ocus on E hiopia
JOURNAL OF APPLIED ECONOMICS 3

allows o an in-dep h analysis o local ac o s in luencing public deb and
economic g ow h. This de ailed case s udy is aluable o o he esea che s as i
can be con as ed wi h esul s om o he na ions, helping o build a b oade
unde s anding o deb dynamics in eme ging economies. This ocus enhances he
specialized li e a u e by o e ing a de ailed, con ex -speci ic s udy ha can in o m
mo e gene alized heo ies and models o public deb and economic g ow h in
de eloping egions.
The emainde o he s udy is o ganized as ollows: Sec ion 2 b ie ly discusses he
gene al ou look o public deb and economic g ow h in E hiopia. Sec ion 3 p esen s
a e iew o he ele an li e a u e. Sec ion 4 discusses he me hodology and da a
used. Sec ion 5 p esen s he indings and discusses he esul s. Sec ion 6concludes
he s udy.
2. The ou look o public deb and economic g ow h in E hiopia
This sec ion p o ides a b ie o e iew o he gene al pa e ns and e olu ion o public deb
and economic g ow h in E hiopia om 1980 o 2021. Howe e , i should be emphasized
a he ou se ha he e olu ion o public deb and economic pe o mance a e closely
connec ed o he dynamics o he poli ical-economic landscape o he pe iod being
examined. Fo ins ance, poli ical ins abili y, as well as d as ic policy changes and e e -
sals, ha e cha ac e ized E hiopia’s long poli ical his o y (Geda & Dege e, 2005). Such
poli ical p ocesses ha e a signi ican impac on he beha io o economic agen s, mac o-
economic balance and pe o mance, domes ic bo owing, and ex e nal inancial lows o
he coun y (Geda, 2008; Geda & Dege e, 2005).
The analysis in his s udy ocuses on wo o he mos ecen egimes ha he coun y
has wi nessed: he “De g” ( he mili a y egime) and he E hiopian People’s Re olu iona y
Democ a ic F on (EPRDF) egime. The pe iod 1974–1991 co esponds o he De g
(mili a y) egime. The De g expe imen ed wi h socialism, in which a cen alized com-
mand sys em con olled all sphe es o decision-making in he coun y (Geda, 2008). This
pe iod is cha ac e ized by he p olonged ci il wa be ween he De g and he hen-
opposi ion pa ies, mainly he EPRDF and E i ean People’s Libe a ion F on (EPLF),
he wa wi h Somalia, delibe a e ma ke and p i a e sec o ep ession policies, na iona-
liza ion policies, and d ough . These ac o s con ibu ed o highly e a ic economic
pe o mance du ing his pe iod (Geda & Yime , 2016).
The second pe iod, om 1991 o he p esen , began wi h he Tig ay People’s
Libe a ion F on (TPLF)-led E hiopian People’s Re olu iona y Democ a ic F on
(EPRDF) aking powe in 1991, mili a ily ous ing he De g. The egime suppo ed ee
ma ke policies and implemen ed ma ke libe aliza ion, as well as a ious e o m p o-
g ams (Geda, 2008; Geda & Yime , 2016). Howe e , his pe iod has also been ma ked by
nume ous episodes o con lic . These include he wa wi h E i ea (1998–2000), he
coun ywide poli ical un es (2015–2018), spo adic e hnic-based con lic s in a ious
pa s o he coun y (mainly in he pos -2018 pe iod), and he Tig ay wa
(No embe 2020–No embe 2022). Thus, he analysis in his s udy needs o be unde -
s ood in he con ex o hese wo egimes and he e en s ha cha ac e ize each pe iod (see
Yime , 2024; Geda & Yime , 2023 o de ails).
4A. YIMER AND A. GEDA
2.1. Public deb ou look in E hiopia
Figu e 1 depic s he e olu ion o public deb ( he sum o ex e nal and domes ic deb ) as
a pe cen age o GDP in E hiopia o e he las ou decades.
As shown in Figu e 1, he coun y has a high dependency on public deb . Du ing he
TPLF-led EPRDF pe iod, he e we e some o he highes peaks, wi h an a e age o 69%
o he domes ic ou pu . This is a signi ican inc ease om he 57% du ing he De g
egime (Figu e 1). As o 2021, he public deb s ood a 51% o he coun y’s GDP. In
some yea s o he TPLF-led EPRDF egime, his a e has eached as high as 110 o 121%
o GDP (Figu e 1).
22.4
79.3
56.5
120.9
70.0
116.8
116.0
110.4
32.1 30.4
59.9
50.7
-3.0
5.0
13.0
21.0
29.0
37.0
45.0
53.0
61.0
69.0
77.0
85.0
93.0
101.0
109.0
117.0
125.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
The De g egime The EPRDF egime
Figu e 1. Public deb ou look in E hiopia (% o GDP), 1980–2021.
Sou ce: Au ho s’ compu a ion based on he Minis y o Finance and Economic De elopmen (MOFED)
a ious yea s’ annual epo s.
-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Pe iod's a e age = -0.2%
Pe iod's a e age = 5%
The De g egime The EPRDF egime
Figu e 2. Real pe capi a GDP g ow h in E hiopia (1980–2021). Sou ce: Au ho s’ compu a ion based on
Na ional Bank o E hiopia’s (NBE) a ious yea s’ annual epo s.
JOURNAL OF APPLIED ECONOMICS 5
2.2. Economic g ow h ou look in E hiopia
Figu e 2 depic s he pa e n o g ow h, as measu ed by eal pe capi a GDP g ow h, o e
he las ou decades. Du ing he s udy pe iod, i.e., 1980–2021, economic g ow h in
E hiopia had wo dis inc ea u es, depending on he egime conside ed (Figu e 2).
Du ing he D eg egime, economic g ow h was e y e a ic (see Figu e 2). G ow h
decele a ed in 1981 be o e eaching a nega i e a e in 1982. The ins abili y induced by he
eme ging new policies o he De g, such as he na ionaliza ion policy, along wi h d ough ,
he wa wi h Somalia, and in e nal ci il wa , explain a signi ican po ion o his decele a -
ing and nega i e g ow h pe o mance. Pa ly due o ela i e poli ical s abili y and a o able
wea he condi ions, a posi i e g ow h a e o 5.3% was eco ded in 1983. In 1984 and 1985,
g ow h decele a ed quickly and eached − 5.2% and − 13.5%, espec i ely, p ima ily due o
a de as a ing d ough . G ow h became posi i e again in 1986 and 1987, eaching 10.1% in
he la e yea . Following he in ensi ied ci il wa and ad e se wea he condi ions, eco-
nomic g ow h u ned nega i e again o each o he yea s be ween 1988 and 1991. O e all,
g ow h du ing his pe iod was e y e a ic and had a nega i e a e age o − 0.2%.
In May 1991, he TPLF-led EPRDF came in o powe . Following a pe iod o low
economic ac i i y and poli ical unce ain y, g ow h emained nega i e in 1992
(−12.3%). G ow h egained momen um and inc eased o 9.4% in 1993. Excep o he
h ee yea s, namely 1997, 1998, and 2003, whe e g ow h was nega i e (p ima ily due o
d ough in hose yea s), he g ow h was hailed as imp essi e o mos o he emaining
pe iod unde he EPRDF. O he no able episodes o eal GDP g ow h in he coun y
include he decele a ion o g ow h in 2006 and 2009, which occu ed as a esul o he
con es ed elec ion in 2005 and he global inancial c isis in 2008/09. Pa ly due o he all
in commodi y p ices in 2011 and he ea e , g ow h decele a ed in he successi e yea s o
2011 and 2012. The poli ical un es in he coun y om 2015 h ough 2018 has also
con ibu ed o he slowdown o economic g ow h du ing he same pe iod. In 2020,
amids he COVID-19 pandemic and he wa in Tig ay, economic g ow h slowed down
bu emained posi i e. O e all, g ow h du ing he pos -De g pe iod has been qui e good,
wi h eal GDP pe capi a g owing by an a e age o 4.5% pe yea (Figu e 2). The
a ailabili y o in e nal and ex e nal deb inancing explains a signi ican po ion o his
g ow h. No wi hs anding he s ong economic g ow h and E hiopia’s s a us as one o he
as es -g owing economies in A ica, i s ill emains one o he poo es coun ies in he
wo ld, wi h a pe capi a income o US$ 835 in 2021 (Wo ld Bank, 2023b).
O e all, du ing he s udy pe iod, he e seems o be a gene al nega i e co ela ion
be ween public deb and economic g ow h, wi h a limi ed episode o posi i e associa ion
(Figu e 3). This will be u he examined econome ically in Sec ion 3.
3. Re iew o li e a u e
The e is no consensus on he e ec s o public deb on economic g ow h. The li e a u e
has iden i ied a ious channels h ough which deb a ec s economic g ow h. The dis-
cussion in his sec ion ocuses on highligh ing he heo e ical and empi ical li e a u e ha
has b oadly shaped he deb -g ow h li e a u e and he ele an s udies ha ha e guided
his s udy.
6A. YIMER AND A. GEDA
3.1. The heo y
The e ec s o public deb on economic g ow h can be b oadly examined using h ee
di e en heo e ical g ow h models: classical and neoclassical g ow h heo ies,
Keynesian and pos -Keynesian g ow h heo ies, and endogenous (new) g ow h
heo ies.
Public deb is conside ed de imen al o long- e m g ow h and economic de elop-
men by he mains eam classical school (see, e.g., Mill, 1848; Rica do, 1817; Smi h,
1776). Unde he p inciple o “laissez- ai e,” in he neoclassical e sion o classical
economics, p oponen s a gue o limi ing he ole o he s a e o ensu ing he p ope
ope a ion o economic ela ions, such as main aining he ule o law, na ional secu i y,
and diploma ic ela ions. Acco ding o his p inciple, he go e nmen is no pe mi ed o
in e e e in he economy. They a gue ha economic esou ces a e managed mo e
ine icien ly in he public sec o compa ed o he p i a e sec o . Addi ionally, public
deb di e s p i a e capi al om i s p oduc i e unc ion o non-p oduc i e uses, which
has a nega i e impac on capi al accumula ion. This di e sion o in es men unde mines
long- e m g ow h (Rica do, 1817; Smi h, 1776). Rica do (1817), in his concep o
Rica dian Equi alence, no ed ha go e nmen bo owing in he p esen equi es u u e
ax a es o be aised abo e he no mal a e in o de o epay he bo owed amoun (see
also Robe s, 1942; Shoup, 1957). This means ha e o s o s imula e he economy by
inc easing public spending h ough deb inancing will be ine ec i e. Taxpaye s a e
awa e ha he epaymen o he deb will ul ima ely ha e o be unded h ough u u e
axes. Because axpaye s sa e in o de o pay he an icipa ed u u e axes ha will be
imposed o inance he epaymen o deb , his will o se he mac oeconomic bene i s o
inc eased agg ega e demand esul ing om inc eased public spending (Ba o, 1974, 1979,
1989; Chu chman, 2001). Thus, in he classical school, public deb is ega ded as
a socie al bu den (Elmendo & Mankiw, 1999; Kuma & Woo, 2010; Woo & Kuma ,
2015).
-15
-10
-5
0
5
10
15
0.0
20.0
40.0
60.0
80.0
100.0
120.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
To al Public Deb (% o GDP) Real pe capi a GDP pe g ow h ( %)
Linea (To al Public Deb (% o GDP)) Linea (Real pe capi a GDP pe g ow h ( %))
Real pe capi a GDP g ow h (%)
To al public deb (% o GDP)
Figu e 3. To al public deb (% o GDP) and eal pe capi a GDP g ow h in E hiopia (1980–2021).
Sou ce: Au ho s’ compu a ion based on g ow h da a om NBE and deb da a om MOFED’s a ious
yea s’ annual epo s.
JOURNAL OF APPLIED ECONOMICS 7
4.2. The in es men equa ion: he heo e ical model and desc ip ion o a iables
Taking in o accoun he c ucial ole o in es men in g ow h, many s udies (see, e.g.,
Ak am, 2015) sugges ha i is impo an o analyse he ela ionship be ween public deb
and in es men as well. To do so, we will also es ima e he ollowing educed- o m
equa ion o in es men .
k ¼γþX
k
j¼1
δjw j þX
p
m¼1
θmpd m þ� (3)
whe e γ deno es he in e cep , k ep esen s in es men a ime w j is a ec o o
con ol a iables, δj is a ec o o he coe icien s o con ol a iables. The ec o pd m
ep esen s a ious public deb indica o s, θm ep esen s he ec o o he coe icien s o
public deb indica o s, and � is he usual e o e m. To analyze he impac s o public
deb on in es men in E hiopia, we used ime se ies da a om 1980 o 2021 (see Table B1
in Appendix B o he lis o a iables, hei measu emen , and he sou ces o da a).
Following he li e a u e on he de e minan s o in es men in gene al and he ela ion-
ship be ween public deb and economic g ow h in pa icula , he in es men equa ion in
his s udy includes he ollowing a iables as eg esso s: he na u al loga i hm o pe
capi a eal GDP yð Þ, he na u al loga i hm o ade openness opð Þ, he na u al loga i hm
o in e es a e i ð Þ, he na u al loga i hm o in la ion in ð Þ and wo public deb indica-
o s, he na u al loga i hm o o al public deb pdð Þ and he na u al loga i hm o public
deb se ice. Thus, by subs i u ing he con ol a iables in Equa ion (3), we can in es i-
ga e he in es men e ec s o deb using Equa ion (4) as shown below:
k ¼αþβ1y þβ2op þβ3i þβ4in þþβ5pd þβ6pds þ� (4)
4.3. The econome ic echnique: he au o eg essi e dis ibu ed lag (ARDL)
app oach
A numbe o coin eg a ion echniques exis in he li e a u e, including he Engle and
G ange (1987), Johansen (1988), Johansen and Juselius (1990), Phillips and Hansen
(1990), G ego y and Hansen (1996), Saikkonen and Lü kepohl (2000), Pesa an and Shin
(1999), Pesa an e al. (1996), and Pesa an e al. (2001) ARDL app oach. This s udy
employs he ARDL app oach ad anced by Pesa an e al. (2001) o empi ically examine
he e ec s o deb on economic g ow h in E hiopia o he pe iod 1980–2021.
The ARDL app oach has se e al ad an ages o e o he coin eg a ion echniques. Fi s ,
i can be used ega dless o whe he he a iables a e in eg a ed o o de 0 (I(0)) o all
in eg a ed o o de 1 (I(1)), o ha e a combina ion o hese in eg a ion o de s.
T adi ional app oaches equi e ha all se ies ha e iden ical o de s o in eg a ion
(Engle & G ange , 1987; Johansen & Juselius, 1990; Phillips & Hansen, 1990). The
ARDL app oach, howe e , will be ine icien in he p esence o I(2) o highe -o de
se ies. Second, unlike o he mul i a ia e coin eg a ion echniques (see, e.g., Johansen &
Juselius, 1990), his me hod is ela i ely simple and allows o es ima ing a coin eg a ion
ela ionship using he o dina y leas squa es (OLS) me hod. Thi d, i is compa a i ely
mo e obus and e icien in small samples comp ising 30 o 80 obse a ions (Pesa an
e al., 2001).
14 A. YIMER AND A. GEDA

In addi ion, adi ional coin eg a ion echniques may also encoun e issues o endo-
genei y, whe eas he ARDL echnique ypically yields unbiased es ima es o he long- un
model and alid -s a is ics, e en when he eg esso s a e endogenous (Na ayan & Smy h,
2005; Ha is & Sollis, 2003; Pa ichis, 1999; H. Pesa an & Shin, 1999; Pesa an e al., 1996,
2001). Fu he mo e, he app op ia eness o using an ARDL model lies in he ac ha i is
based on a single-equa ion amewo k. ARDL coin eg a ion es ima es sho - and long-
un ela ionships simul aneously and p o ides unbiased and e icien es ima es (H.
Pesa an & Shin, 1999). An e o co ec ion model (ECM) can also be de i ed om an
ARDL model h ough a simple linea ans o ma ion (H. Pesa an & Shin, 1999). As
no ed by H. Pesa an and Shin (1999), ECM combines sho - e m adjus men s wi h long-
e m equilib ium while e aining long- e m in o ma ion. These ad an ages o he ARDL
echnique o e o he s anda d coin eg a ion echniques jus i y i s applica ion in his
s udy.
The es ima ion p ocedu e in he ARDL amewo k in ol es wo s eps. Fi s , he
exis ence o a long- un ela ionship be ween he a iables o he model is es ed by
conside ing F-s a is ics, e e ed o as a “bound es .” I e idence o a long- un ela ion-
ship is ound, he ARDL me hod is used a he second s age o es ima e he sho - un and
long- un pa ame e s. Following M. Pesa an e al. (2001), he ARDL model in his s udy
can be w i en as ollows:
y ¼αX
p
i¼1
γiy iþX
k
j¼1X
qj
i¼0
X0
j; iβj;iþε (5)
An ARDL is a leas squa es eg ession ha includes he lags o bo h he dependen
a iable (y) and he explana o y a iables ( he X’s) in Equa ion 5. ARDL models a e
ypically ep esen ed as ARDL (p;q1;...;qh), whe e p ep esen s he numbe o lags o
he dependen a iable, q1 ep esen s he numbe o lags o he i s explana o y a iable,
and qh ep esen s he numbe o lags o he k- h explana o y a iable. Fo an ARDL
model w i en as Equa ion (5), some o he explana o y a iables, Xj, may ha e no lagged
e ms in he model (qj¼0). These a iables a e e e ed o as s a ic o ixed eg esso s.
Explana o y a iables wi h a leas one lagged e m a e called dynamic eg esso s.
To speci y an ARDL model, we mus i s de e mine he numbe o lags o each
a iable o be included (i.e., speci y ;q1;. . . ;qh) in he models. In his s udy, he op imal
lag o de o he ARDL is de e mined using he Schwa z In o ma ion C i e ion (SIC). The
SIC is pa icula ly sui able o small sample sizes and o e s a mo e concise speci ica ion
compa ed o o he in o ma ion c i e ia in he li e a u e (H. Pesa an & Pesa an, 2009).
4.3.1. Long- un ela ionships
Since an ARDL model es ima es he dynamic ela ionship be ween a dependen a iable
and explana o y a iables, i is possible o ans o m he model in o a long- un ep e-
sen a ion. This ep esen a ion shows he long- un impac o changes in he explana o y
a iables, including public deb indica o s, on he dependen a iable in ou models. The
calcula ion o hese es ima ed long- un coe icien s, once he es ima ion is comple e, is
gi en by Equa ion (6) as:
JOURNAL OF APPLIED ECONOMICS 15
θj¼αPqj
i¼1^
βj;i
1Pp
i¼1γi
(6)
4.3.2. Coin eg a ing ela ionships
The coin eg a ing eg ession om an ARDL model is ob ained by ans o ming Equa ion
(5) in o di e ences and subs i u ing he long- un coe icien s om Equa ion (6) in o he
esul ing equa ion, esul ing in (7):
Δy ¼  X
p1
i¼1
γ�
iΔy iþX
k
j¼1X
qj1
i¼0
ΔX0
j; iβ�
j;i^
ϕEC 1þε (7)
whe e EC ¼y αPk
j¼1X0
j; ^
θj; ^
ϕ¼1Pp
i¼1^
γi; β�
j;i¼Pqj
j¼1βj;m
4.3.3. Bounds es ing
Using he coin eg a ing ela ionship o m in Equa ion (7), Pesa an e al. (2001) p o ided
a me hodology o es ing whe he he ARDL model con ains a le el (o long- un)
ela ionship be ween he dependen a iable and he eg esso s. The Bounds es p oce-
du e ans o ms Equa ion (7) in o he ollowing ep esen a ion:
Δy ¼  X
p1
i¼1
γ�
iΔy iþX
k
j¼1X
qj1
i¼0
ΔX0
j; iβ�
j;iρy 1αX
k
j¼1
X0
j; 1δjþε (8)
The es o he exis ence o le el ela ionships is hen simply a es o
ρ¼0
δ1¼δ2¼. . . ¼δk¼0 (9)
The coe icien es ima es used in he es can be ob ained om a eg ession using
Equa ion (5) o can be es ima ed di ec ly om a eg ession using Equa ion (8).
The es s a is ic, based on Equa ion (9), has a dis inc dis ibu ion unde he null
hypo hesis (which assumes no le el ela ionships). This dis ibu ion a ies depending on
whe he he eg esso s a e all I(0) o all I(1). Fu he , in bo h cases, he dis ibu ion is
non-s anda d. M. Pesa an e al. (2001) p o ide c i ical alues o cases whe e all eg es-
so s a e I(0) and cases whe e all eg esso s a e I(1). They sugges using hese c i ical
alues as uppe and lowe bounds o he mo e ypical cases whe e he eg esso s a e
a mix u e o I(0) and I(1).
A his s age, he o de o in eg a ion o each a iable should be de e mined be o e any
in e ences can be made. When he o de o in eg a ion o all he a iables is ound o be I
(1), he decision is made based on he uppe c i ical bound. On he o he hand, i all he
se ies a e I(0), hen he decision is made based on he lowe c i ical bound. I he
F-s a is ic is highe han he uppe bound c i ical alue, we ejec he null hypo hesis
(H_0) o no coin eg a ion and conclude in a o o a long- un ela ionship. In con as , i
he F-s a is ic is below he lowe c i ical bound, hen we canno ejec he null hypo hesis
o no coin eg a ion, indica ing ha he e is no long- un ela ionship. Howe e , i he
F-s a is ic alls be ween he uppe -bound and lowe -bound c i ical alues, he in e ence
would be inconclusi e.
16 A. YIMER AND A. GEDA
The s anda d o dina y leas squa es (OLS) model calcula es he coe icien
co a iance ma ix assuming ha he e a e no issues o au oco ela ion o he e o-
skedas ici y in he e o e ms (Geda & Yime , 2016; Whi e, 1980). I hese
assump ions do no hold, in e ences based on he esul ing e o -co ec ion
model (ECM) will be in alid (Roecke , 1991; Whi e, 1980; Woold idge, 2000).
Howe e , he e oskedas ici y and au oco ela ion a e common issues encoun e ed
in ime se ies analysis. Thus, in such s udies, i is impo an o es ima e he
coe icien co a iance ma ix unde he assump ion ha e o s a e condi ionally
he e oskedas ic and se ially co ela ed (Newey & Wes , 1987). The esul ing
es ima o o he coe icien co a iance is he He e oskedas ici y and
Au oco ela ion Consis en Co a iance (HAC) o Newey-Wes es ima o . This
p ocedu e will only modi y he s anda d e o s o he es ima ed coe icien s
wi hou al e ing he coe icien s (Newey & Wes , 1987). This s udy has ollowed
he p ocedu e.
Finally, a se ies o diagnos ic es s a e conduc ed o assess he obus ness and elia-
bili y o he ARDL model. These es s include assessing he no mali y o he e o e m,
checking o se ial co ela ion and he e oscedas ici y, and e i ying he unc ional o m
o he empi ical model. All o he models ha ha e been epo ed ha e passed hese es s.
The models epo ed he e a e, hus, he bes models ha we came up wi h a e
expe imen ing by es ima ing a ious models wi h di e en speci ica ions, da a poin s,
and a ba e y o diagnos ic es s.
In his s udy, wo e sions o he g ow h and in es men equa ions a e es ima ed. The
i s model uses he o al public deb s ock a iable, while he second model disagg ega es
he o al public deb s ock a iable in o ex e nal public deb and domes ic public deb in
bo h he g ow h and in es men equa ions. The ARDL speci ica ion o he models used
o in es iga e he e ec s o public deb on economic g ow h and he public deb -
in es men nexus can be w i en as ollows:
Δy ¼αþβ1y 1þβ2popg 1þβ3k 1þβ4op 1þβ5gc 1þβ6pd 1þβ7pds 1
þX
p1
i¼0
γ1iΔpopg iþX
p2
i¼0
γ2iΔk iþX
p3
i¼0
γ3iΔop 1þX
p4
i¼0
γ4iΔgc i
þX
p5
i¼0
γ5iΔpd iþX
p6
i¼0
γ6iΔpds iþε
(10)
Δy ¼αþβ1y 1þβ2popg 1þβ3k 1þβ4op 1þβ5gc 1þβ6epd 1
þβ7dpd 1β8pds 1þX
p1
i¼0
γ1iΔpopg iþX
p2
i¼0
γ2iΔk iþX
p3
i¼0
γ3iΔop 1
þX
p4
i¼0
γ4iΔgc iþX
p5
i¼0
γ5iΔepd iX
p6
i¼0
γ6iΔdpd iþX
p7
i¼0
γ7iΔpds iþε
(11)
JOURNAL OF APPLIED ECONOMICS 17
Δk ¼αþβ1k 1þβ2y 1þβ3op 1þβ4i 1þβ5in 1þβ6pd 1þβ7pds 1X
p1
i¼0
γ1iΔy i
þX
p2
i¼0
γ2iΔop 1þX
p3
i¼0
γ3iΔi iþX
p4
i¼0
γ4iΔin iþX
p5
i¼0
γ5iΔpd i
þX
p6
i¼0
γ6iΔpds iþ�
(12)
Δk ¼αþβ1k 1þβ2y 1þβ3op 1þβ4i 1þβ5in 1þβ6epd 1þβ7dpd 1
þβ8pds 1X
p1
i¼0
γ1iΔy iþX
p2
i¼0
γ2iΔop 1þX
p3
i¼0
γ3iΔi iþX
p4
i¼0
γ4iΔin i
þX
p5
i¼0
γ5iΔepd iþþX
p6
i¼0
γ6iΔdpd iþX
p7
i¼0
γ7iΔpds iþ�
(13)
5. Discussion o esul s
In his sec ion, we will begin by p esen ing he p e-es ima ion es s ha we e conduc ed.
The es ima ed model esul s a e hen p esen ed, along wi h a es o assess he obus ness
o hese esul s.
5.1. The econome ic esul s
Be o e conduc ing econome ic es ima ion, a es o he s a iona i y o he a iables is
pe o med (Table 1, wi h epo ed p- alues). The esul s indica e ha mos o he
a iables a e I(1), while o he s a e I(0) (Tables 1).
Table 1. ADF uni - oo es esul s.
Va iable
Le el Fi s di e ence
In e enceIn e cep In e cep & end In e cep In e cep & end
y0.99 0.92 0.00 0.00 I(1)
k0.38 0.14 0.00 0.00 I(1)
popg 0.00 0.00 0.00 0.00 I(0)
h0.82 0.13 0.04 0.08 I(1)
op 0.53 0.12 0.00 0.00 I(1)
gc 0.47 0.31 0.00 0.00 I(1)
i 0.22 0.46 0.00 0.00 I(1)
in 0.00 0.00 0.00 0.00 I(0)
pd 0.10 0.17 0.00 0.00 I(1)
epd 0.30 0.30 0.00 0.00 I(1)
dpd 0.11 0.17 0.00 0.00 I(1)
pds 0.66 0.91 0.06 0.00 I(1)
No e: All he a iables a e as de ined p e iously (see also o Table B1 in he Appendix).
18 A. YIMER AND A. GEDA
A e de e mining he o de o in eg a ion in he a iables o ou empi ical model, as
gi en in Equa ions (10)–(13), he bounds es o coin eg a ion is conduc ed using he
app op ia e lag leng h. One o he mos impo an issues in applying he ARDL app oach
is choosing he o de o he dis ibu ed lag unc ions.
8
The esul s om he bounds es o he ou models es ima ed in his s udy
(i.e., wo o he g ow h and wo o he in es men models) a e p esen ed in
Tables 2. Based on he bounds es o coin eg a ion shown in Table 2, he null
hypo hesis o no long- un ela ionship among he a iables in he espec i e
models (i.e., he g ow h and in es men models) is ejec ed. This is because he
compu ed F-s a is ic o he es equa ion is g ea e han he uppe -bound c i ical
alue e en a he one-pe cen le el o signi icance o bo h he g ow h and he
in es men models.
Table 2. The bound- es o coin eg a ion.
Me hod: ARDL Bounds Tes
Sample: 1980–2021
Null Hypo hesis: No long- un ela ionships exis
Tes S a is ic Value k
Model 1
(Eq. 10)
The g ow h model
(To al public deb a iable used as a eg esso )
F-s a is ic 6.37 7
Signi icance I0
Bound
I1
Bound
10% 2.12 3.23
5% 2.45 3.61
1% 3.15 4.43
Model 2
(Eq. 11)
The g ow h model
(Ex e nal public deb and domes ic public deb eplace o al public
deb as eg esso s.)
F-s a is ic 7.84 7
Signi icance I0
Bound
I1
Bound
10% 2.38 3.45
5% 2.69 3.83
1% 3.31 4.63
Model 3
(Eq. 12)
The in es men model
(To al public deb a iable used as a eg esso ) F-s a is ic 5.16 6
Signi icance I0
Bound
I1
Bound
10% 2.12 3.23
5% 2.45 3.61
1% 3.15 4.43
Model 4
(Eq. 13)
The in es men model
(Ex e nal public deb and domes ic public deb eplace o al public
deb as eg esso s.)
F-s a is ic 6.12 7
Signi icance I0
Bound
I1
Bound
10% 2.38 3.45
5% 2.69 3.83
1% 3.31 4.63
No e: In Model 1, he coin eg a ion es equa ion includes he dependen a iable yð Þ and he ollowing eg esso s: pd,
pds, popg, k, op, and gc. In Model 2, pd is eplaced by i s componen s, epd and dpd, while keeping all o he a iables in
Model 1 unchanged. In Model 3, he coin eg a ion es equa ion includes he dependen a iable (k) and he ollowing
eg esso s: pd, pds, i , in , and op. In Model 4, pd is eplaced by i s componen s, epd and dpd, while keeping all o he
a iables in Model 3 unchanged. All he a iables a e as de ined p e iously and also in Table B1 in Appendix B. Pesa an
e al. (2001) c i ical alues o he bounds es a e used and epo ed.
8
Since we ha e a small da a sample (42 annual obse a ions), SIC is he c i e ion used o choosing lag leng hs. M. Pesa an
e al. (2001) showed ha SIC is p e e able o o he lag-leng h selec ion c i e ia because i is sui able o small sample
sizes.
JOURNAL OF APPLIED ECONOMICS 19

5.1.1. The g ow h e ec : he long- un and sho - un models esul s
This sec ion aims o answe he ques ion, “Does public deb a ec economic g ow h in
E hiopia?”, and p esen s he esul s o he es ima ed models o his exe cise. Speci ically,
he es ima ion esul s o Equa ions (10) and (11) a e discussed (see Tables 3 and 4).
Table 3 p esen s he es ima ed esul s o he g ow h model speci ied in Eq. (10), in
which o al public deb and public deb se ice a e used as indica o s o he deb a iable.
The esul s show ha public deb has a signi ican nega i e e ec on eal ou pu pe
capi a in he long un. Howe e , i s sho - un e ec can be bo h nega i e and posi i e,
depending on he ime lag.
Table 3. The sho un and long un model esul : he g ow h model (Equa ion 10.)
Model: ARDL Coin eg a ing and Long Run Fo m
Sample: 1980 2021
The sho un model (E o Co ec ion Model (ECM)) esul
Dependen Va iable: Δ ln eal GDP pe capi a
Selec ed Model: ARDL(3, 1, 1, 2, 2, 2, 2)
Va iable Coe icien S anda d e o P ob.
Δ(ln eal GDP pe capi a(−1)) −0.20** 0.06 0.01
Δ(ln eal GDP pe capi a(−2)) −0.82*** 0.09 0.00
Δ(ln popula ion g ow h) −0.19*** 0.04 0.00
Δ(ln g oss capi al o ma ion as % o GDP) 0.16*** 0.04 0.00
Δ(ln go e nmen consump ion as % o GDP) 0.01 0.04 0.90
Δ(ln go e nmen consump ion as % o GDP(−1)) −0.07*** 0.04 0.00
Δ(ln openness) 0.09* 0.04 0.07
Δ(ln openness(−1)) −0.08** 0.03 0.03
Δ(ln o al public deb as % o GDP) −0.14*** 0.04 0.00
Δ(ln o al public deb as % o GDP(−1)) 0.14** 0.05 0.03
Δ(ln public deb se ice as % o expo s) −0.02*** 0.03 0.08
Δ(ln public deb se ice as % o expo s(−1)) −0.02*** 0.02 0.00
Δ(Regime dummy) −0.08*** 0.01 0.00
EC(−1) −0.25*** 0.05 0.00
The long un model esul
Dependen Va iable: ln eal GDP pe capi a
ln popula ion g ow h −1.72** 0.64 0.02
ln g oss capi al o ma ion as % o GDP 0.88** 0.28 0.01
ln go e nmen consump ion as % o GDP −0.08 0.15 0.58
ln ade openness 0.69*** 0.14 0.00
ln o al public deb as % o GDP −0.93*** 0.19 0.00
ln public deb se ice as % o expo s −0.17*** 0.02 0.00
Regime dummy −0.30*** 0.06 0.00
Cons an 6.81*** 0.62 0.00
@ end 0.0004 0.0013 0.77
Model diagnos ic es s
Tes s a is ic Value
R-squa ed 0.99
Adjus ed R-squa ed 0.99
F-s a is ic 28.11
Ja que - Be a 2.55
P ob(Ja que - Be a) 0.28
B eusch-God ey Se ial Co ela ion LM Tes ♣0.23
He e oskedas ici y Tes : ARCH
♣
0.82
Ramsey RESET Tes
♣
0.71
No e: Δ deno es change and ***, **, * indica es 1 %, 5% and 10% le el o signi icance espec i ely. EC is he adjus men
coe icien ( he e o co ec ion e m).
♣
in he diagnos ic es s indica es ha he P- alue o he F-S a is ics is epo ed.
20 A. YIMER AND A. GEDA
Deb se ice is ound o ha e a signi ican nega i e e ec in bo h he long un and he
sho un. Howe e , when compa ed o he sho un, he magni ude o he e ec is
ound o be s onge in he long un (Table 3). In E hiopia, high public deb se ice
paymen s can ha e a nega i e e ec on economic g ow h in bo h he sho un and he
long un, especially when he go e nmen ’s iscal space is limi ed. As a esul o high deb
se ice paymen s, he go e nmen has less oom o maneu e when dealing wi h eco-
nomic down u ns, which can esul in educed public in es men , lowe p oduc i i y,
and slowe economic g ow h. Mo eo e , he go e nmen may some imes ely on
Table 4. The sho un and long un model esul : he g ow h model (Equa ion 11.)
Me hod: ARDL Coin eg a ing And Long Run Fo m
Sample: 1980 2021
The sho un model (E o Co ec ion Model (ECM)) esul
Dependen Va iable: Δ ln eal GDP pe capi a
Selec ed Model: ARDL(3, 2, 1, 1, 2, 0, 2, 2)
Va iable Coe icien S anda d e o P ob.
Δ(ln eal GDP pe capi a(−1)) −0.02 0.07 0.82
Δ(ln eal GDP pe capi a(−2)) −0.80*** 0.11 0.00
Δ(ln popula ion g ow h) −0.25*** 0.04 0.00
Δ(ln popula ion g ow h (−1)) 0.16** 0.05 0.01
Δ(ln g oss capi al o ma ion as % o GDP) 0.20*** 0.01 0.00
Δ(ln go e nmen consump ion as % o GDP) 0.04* 0.02 0.06
Δ(ln openness) 0.02 0.01 0.30
Δ(ln openness(−1)) −0.09*** 0.01 0.00
Δ(ln ex e nal public deb as % o GDP) −0.13*** 0.01 0.00
Δ(ln domes ic public deb as % o GDP) 0.05*** 0.01 0.00
Δ(ln domes ic public deb as % o GDP (−1)) 0.20*** 0.02 0.00
Δ(ln public deb se ice as % o expo s) 0.01 0.03 0.74
Δ(ln public deb se ice as % o expo s (−1)) −0.07*** 0.02 0.00
Δ(Regime dummy) −0.05*** 0.01 0.00
EC(−1) −0.31*** 0.02 0.00
The long un model esul
Dependen Va iable: ln eal GDP pe capi a
ln popula ion g ow h −2.30*** 0.32 0.00
ln g oss capi al o ma ion as % o GDP 0.79*** 0.06 0.00
ln go e nmen consump ion as % o GDP −0.40*** 0.06 0.00
ln openness 0.44*** 0.10 0.00
ln ex e nal public deb as % o GDP −0.42*** 0.02 0.00
ln domes ic public deb as % o GDP −0.33** 0.12 0.02
ln public deb se ice as % o expo s −0.25*** 0.01 0.00
Regime dummy −0.17*** 0.03 0.00
Cons an 6.18*** 0.34 0.00
@ end 0.007 0.005 0.17
Model diagnos ic es s
Tes s a is ic Value
R-squa ed 0.99
Adjus ed R-squa ed 0.99
F-s a is ic 46.22
P ob(F-s a is ic) 0.39
Ja que - Be a 0.39
P ob(Ja que - Be a) 0.82
B eusch-God ey Se ial Co ela ion LM Tes
♣
0.24
He e oskedas ici y Tes : ARCH
♣
0.11
Ramsey RESET Tes
♣
0.72
No e: Δ deno es change and ***, **, * indica es 1 %, 5% and 10% le el o signi icance espec i ely. EC is he
adjus men coe icien ( he e o co ec ion e m).
♣
in he diagnos ic es s indica es ha he P- alue o he
F-S a is ics is epo ed.
JOURNAL OF APPLIED ECONOMICS 21
inc eased axa ion o se ice i s deb , which can educe consume and business con-
idence, he eby lowe ing economic g ow h in bo h he sho un and he long un.
Finally, in E hiopia, high public deb se ice paymen s o en lead o in la iona y p es-
su es. I he go e nmen p in s mo e cu ency o inance i s domes ic deb se ice
obliga ions, his can lead o in la ion, which can u he educe economic g ow h in
he long un.
Table 4 p esen s he es ima ed esul s o he g ow h model gi en in Eq. (11), speci i-
cally he g ow h model wi h a disagg ega ed public deb a iable. The esul s show ha
public deb can ha e bo h nega i e and posi i e e ec s, depending on he sou ces o
bo owing and he ime pe iod conside ed.
As shown in Table 4, he analysis e eals ha ex e nal deb has a de imen al impac
on he eal pe capi a ou pu o he coun y, bo h in he sho and long un, while
domes ic deb is ound o ha e a posi i e e ec on economic g ow h in he sho un, bu
i s long- un e ec is nega i e. Simila o ou ea lie inding in he p e ious model
(Table 3), we ind ha deb se icing has a signi ican nega i e e ec on he eal pe
capi a ou pu o he coun y, bo h in he sho un and he long un (Table 4).
Based on he esul s p esen ed in Tables 3 and 4, he es ima ed coe icien o he
e o -co ec ion e m (EC) is signi ican in bo h speci ica ions. This inding sugges s
ha , as no ed by Bane jee e al. (1998), a signi ican nega i e coe icien o he e o -
co ec ion e m p o ides addi ional e idence o a s able long- e m ela ionship among
he a iables used in he model.
Wi h ega d o he con ol a iables, he esul s o bo h models a e gene ally con-
sis en wi h he indings o p e ious s udies on economic g ow h. Fo ins ance, in he
long un, popula ion g ow h and go e nmen consump ion ha e a nega i e impac on
eal pe capi a ou pu . On he o he hand, g oss capi al o ma ion and ade openness
ha e a signi ican posi i e impac on he coun y’s pe capi a ou pu . These indings on
he con ol a iables align wi h he esul s o exis ing li e a u e and a e consis en wi h
expec a ions, as hey ha e ex ensi e empi ical suppo (see, o example, Yime , 2023a,
2024).
In summa y, he sho - un nega i e e ec s o public deb on eal pe capi a ou pu
may be due o he necessi y o di e ing esou ces away om p oduc i e ac i i ies in
o de o se ice he deb . While he posi i e esul s on public deb lows sugges ha
public deb can help s imula e economic g ow h h ough capi al o ma ion. A simila
esul has been ound in o he s udies conduc ed in di e en coun ies (see, e.g., Ak am,
2015; Mohamed, 2013). The long- un nega i e e ec o public deb on pe capi a GDP
aligns wi h he widely held iew ha public deb has a de imen al impac on economic
g ow h (see, e.g., Table A1 in Appendix A o u he de ails).
A ba e y o model diagnos ic es s was applied o assess he obus ness o he
es ima ed models. The es s indica e ha he es ima ed models ha e he desi ed s a is ical
p ope ies (see Tables 3 and 4). Bo h models ha e a good i . In addi ion, he models
success ully passed a ba e y o es s, including es s o no mali y, he e oskedas ici y,
se ial co ela ion, model speci ica ion, and s abili y. The Ja que-Be a s a is ic con i ms
he no mali y o he esiduals, as he null hypo hesis ha “e o s a e no mally dis ib-
u ed” is no ejec ed in each o he speci ica ions o he g ow h model. Based on he
esul s o he B eusch-God ey Lag ange Mul iplie (LM) es and he Au o eg essi e
Condi ional He e oskedas ici y (ARCH) es , we do no ha e enough e idence o ejec
22 A. YIMER AND A. GEDA
he null hypo heses o no se ial co ela ion and no he e oscedas ici y o he esiduals,
espec i ely. Thus, he e a e no issues o se ial co ela ion o he e oskedas ici y in he
es ima ed models. The Ramsey Reg ession Equa ion Speci ica ion E o Tes (RESET)
suppo s he null hypo hesis o he co ec unc ional o m (Tables 3 and 4).
Model pa ame e s abili y is one o he equi emen s o a well-speci ied and pe o m-
ing ARDL model (Mu hy & Okunade, 2016). The s abili y o he eg ession coe icien s
is e alua ed h ough s abili y es s, which can de e mine whe he he eg ession equa ion
emains s able o e ime (H. Pesa an & Pesa an, 2009). To assess he s abili y o he
es ima ed coe icien s, we conduc ed cumula i e sum (CUSUM) and cumula i e sum o
squa es (CUSUMSQ) es s on he ecu si e esiduals de i ed om he es ima ed ARDL
models o each speci ica ion o he g ow h equa ion, i.e., Equa ions 10 and 11. As
depic ed in Figu es 4 and 5, he plo s o he CUSUM and CUSUMSQ s a is ics bo h
all wi hin he c i ical bounds a he 5% signi icance le el and do no c oss he lowe and
uppe c i ical limi s in any o he es ima ed models. This indica es ha he es ima ed
coe icien s exhibi he desi ed cha ac e is ics o pa ame e s abili y h oughou he en i e
sample pe iod o he es ima ed model.
Wi h ega d o he obus ness check, he es ima ed baseline g ow h models we e
examined o assess he obus ness o he esul s. Al hough he esul s om such exe cises
a e no epo ed he e, al e na i e speci ica ions using di e en se s o con ol a iables o
he es ima ed models ha e shown ha he indings a e obus ac oss di e en
Figu e 4. Pa ame e s abili y es s: he g ow h model epo ed in Table 3.
Figu e 5. Pa ame e s abili y es s: he g ow h model epo ed in Table 4.
JOURNAL OF APPLIED ECONOMICS 23
ORCID
Addis Yime h p://o cid.o g/0000-0002-9494-2386
A ailabili y o da a and ma e ials
All da a analyzed in his s udy a e a ailable on eques om he au ho s.
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36 A. YIMER AND A. GEDA
Appendices
Appendix A. An o e iew o empi ical li e a u e on he e ec s o public deb on economic g ow h
Table A1. An o e iew o empi ical li e a u e on he e ec s o public deb on economic g ow h.
Au ho Scope Deb ype Me hod
E ec on g ow h
Linea
Non-linea (Th eshold
e ec )
De eloping coun ies
Sandow e al. (2022) 31 sub-Saha a A ican (SSA) coun ies
(2005–2017)
Ex e nal deb Sys em gene alized me hod o momen s (SGMM) and panel
smoo h ansi ion eg ession (PSTR)
Nega i e 45% o GDP
Mohsin e al. (2021) Sou h Asian coun ies, (A ghanis an,
Bangladesh, Bhu an, India, Pakis an,
S i Lanka, Maldi es, and Nepal)
(2000–2018)
Ex e nal deb Panel o dina y leas squa e, ixed e ec , Quan ile eg ession, and
obus ou pu eg ession we e used o analyze he Wo ld Bank
da a om 2000 o 2018. Sou h Asian coun ies,
Nega i e
Mai a (2019) S i Lanka (1977–2016) Ex e nal deb ARDL Nega i e
Adamu and Rasiah
(2016)
Nige ia (1970–2013) Ex e nal deb ARDL Nega i e
Owusu-Nan wi and
E ickson (2016)
Ghana (1970–2012) Ex e nal deb Johansen coin eg a ion and Vec o E o Co ec ion Model (VECM) Posi i e
Siddique e al. (2016) 40 hea ily indeb ed poo coun ies
(HIPCs) (1970-2007)
Ex e nal deb ARDL Nega i e
Doğan and Bilgili
(2014)
Tu key (1974–2009) Ex e nal deb Ma ko Regime-swi ching app oach Nega i e
Zouhaie and Fa ma
(2014)
19 de eloping coun ies (1990-2011) Ex e nal deb Dynamic panel eg ession (A ellano‐Bond es ima o ) Nega i e
Mohamed (2013) Tunisia (1970–2010) Ex e nal deb Engel and G ange
e o co ec ion model (ECM)
Nega i e >30% o GDP
Tche eni e al. (2013) Malawi (1975–2003) Ex e nal deb ze o
Adegbi e e al. (2008) Nige ia (1975–2005) Ex e nal deb OLS and gene alized leas squa es (GLS) Nega i e
Pa illo e al. (2006) 93 de eloping (1969–1998) Ex e nal deb OLS; Ins umen al a iables (IV); FE; and SGMM Nega i e 35–40% o GDP
Clemen s e al. (2003) 55 low‐income coun ies
(1970–1999)
Ex e nal deb Fixed e ec s (FE) & SGMM Nega i e >35% o GDP
Fosu (1999) 35 sub-Saha an A ica (SSA) (1980–
1990)
Ex e nal deb OLS Nega i e
(Con inued)
JOURNAL OF APPLIED ECONOMICS 37
Table A1. (Con inued).
Au ho Scope Deb ype Me hod
E ec on g ow h
Linea
Non-linea (Th eshold
e ec )
Elbadawi e al. (1997) 99 de eloping
coun ies spanning SSA, La in
Ame ica, Asia, and he Middle
Eas
Ex e nal deb C oss-sec ion
Reg ession (Fixed and andom e ec )
Nega i e
De eloped coun ies
Liaqa (2019) 39 high income coun ies
(1980–2017)
Domes ic deb Panel VAR Nega i e
Pegkas (2019) G eece (1970–2016) Domes ic deb Reg ession model wi h mul iple h esholds 21%—50% & >90%
o GDP
De Vi a e al., (2018) 10 EMU, US, UK and Japan
(1970–2014)
Domes ic deb G ange causali y & ARDL coin eg a ion Nega i e
Es e e and Tama i
(2018)
Spain (1851–2013) Domes ic deb Dynamic O dina y Leas Squa e (DOLS) No h eshold
Gómez-Puig and
Sos illa-Ri e o
(2018)
Eu o a ea coun ies
(1961–2015)
Domes ic deb Panel ARDL Posi i e
Shaho (2018) Is ael (1983–2013) Domes ic deb Unde ined
Pegkas (2018) G eece (1970–2016) Domes ic deb ARDL & VAR >90% o GDP
Amann and
Middledi ch (2020)
Uni ed Kingdom (1995–2013) Domes ic deb G ange causali y & coin eg a ion es s Nega i e
Kempa and Khan
(2017)
11 majo Eu o zone coun ies
(1991–2014)
Domes ic deb Panel VAR ze o
Lee e al. (2017) Ad anced economies
(1946–2009)
Domes ic deb Median eg ession 21%—50% o GDP
Panizzaa and
P esbi e o
(2014)
17 de eloped OECD coun ies Public
deb
(Domes ic
deb &
ex e nal deb )
IV ze o No h eshold
Reinha and Rogo
(2010)
(Con inued)
38 A. YIMER AND A. GEDA
Table A1. (Con inued).
Au ho Scope Deb ype Me hod
E ec on g ow h
Linea
Non-linea (Th eshold
e ec )
Mixed coun ies (De eloping and De eloped)
As e iou e al. (2021) 14 coun ies in Asia
(1980–2012)
Public deb
(Domes ic
deb &
ex e nal deb )
Pooled mean g oup (PMG), mean g oup (MG), dynamic
ixed e ec s (DFE) allowing o common co ela ed, and
asymme ic panel Au o eg essi e Dis ibu ed Lag Model (ARDL)
me hod
Nega i e
Lim (2019) 41 ad anced & eme ging economies
(1952–2016)
To al Deb
(p i a e &
public deb )
Panel VAR Nega i e
In a aglia e al.
(2018)
48 de eloping & de eloped coun ies
(1961–2015)
Domes ic deb Panel VAR Nega i e
A čabić e al. (2018) OECD & non-OECD coun ies
(1960–2009)
Domes ic deb Panel VAR, FE, FE wi h IV, SGMM ze o No h eshold
Bu kus and Sepu iene
(2018)
152 coun ies (1996–2016) Domes ic deb SGMM, Pooled OLS (POLS) & LSDV <20% & >90% o GDP
Ka adam (2018) 135 coun ies (1970–2012) Domes ic deb PSTR 71%—90% & >90%
o GDP
Ramos-He e a and
Sos illa-Ri e o
(2017)
115 de eloped & de eloping
economies (1970–2013)
Public deb
(Domes ic &
ex e nal deb )
Mean, median, winso ized mean & immed mean Nega i e
Chudik e al. (2017) 40 coun ies (1965–2010) Domes ic deb Panel ARDL Nega i e
Ewaida (2017) Highly indeb ed coun ies in Eu o &
non-Eu o zone (1993–2013)
Domes ic deb POLS Nega i e
Kim e al. (2017) 77 coun ies (1990–2014) Domes ic deb POLS, FE & SGMM No h eshold
Chiu and Lee (2017) 61 coun ies (1985–2009) Domes ic deb PSTR Posi i e &
Nega i e
B ida e al. (2017) 16 coun ies in Eu o & non-Eu o
(1977–2015)
Domes ic deb Minimal spanning ee & hie a chical ee 71%—90% o GDP
Ahlbo n &
Schweicke (2018)
111 de eloping & de eloped
economies (1971–2010)
Domes ic deb FE & 2SLS 51%—70% o GDP
Chen e al. (2017) 65 de eloping & de eloped economies
(1991–2014)
Domes ic deb PSTR 21%—50% o GDP
(Con inued)
JOURNAL OF APPLIED ECONOMICS 39