Public Debt and Economic Growth in MENA Countries. An Analysis by Panel Co-Integration Techniques

Abstract

This study analyzes the dynamic relationship between public debt and economic growth in the economies of the MENA region during 1996 -2020. To do this, two econometric tools were applied. The first method presents panel cointegration techniques and Granger causality tests to verify the existence of a long-term relationship and examine the direction of causality between the different variables chosen. The FMOLS and DOLS panel techniques were used to estimate the long-term parameters. Thus, we show that the long-term impact of public debt on economic growth is both positive and significant. The second method describes the link using a linear growth model and another dynamic model. The latter two were estimated using the generalized moments method with dynamic panel data. The results show a close relationship between the exogenous variable debt and endogenous variable economic growth, and that debt positively affects growth up to a certain threshold. Beyond this threshold, the effect becomes negative and significant. Nevertheless, we have concluded that from a certain threshold, debt can exceed the repayment capacities and, therefore, disadvantage growth, which will in turn discourage domestic investments and savings.