Interactions of Gross Domestic Product, External Debt and Government Expenditure: Evidence From International Development Association Countries [A Panel-VAR Approach]

Abstract

The study employed a Panel Vector Autoregressive (PVAR) model to examine the relationships among three macroeconomic variables- Gross Domestic Product, Total External Debt Stocks, and Gross National Expenditure - in International Development Association (IDA) member countries. Data from three different time frames - 1991-2019 (29 countries), 1994-2018 (35 countries), and 2008-2018 (39 countries) – was analyzed, and the lags of endogenous variables were used as instruments to address endogeneity issues in the dynamic model. The variables were transformed into growth rates to ensure stationarity and were estimated using the Generalized Method of Moments (GMM). The results were reported after removing both panel-specific and time-specific fixed effects. The study found a positive relationship between Total External Debt Stocks growth and Gross Domestic Product growth, which became more significant with the increase in the sample timeframe. The findings showed that a 100% increase in Total External Debt growth would lead to a 4-7% increase in Gross Domestic Product growth. The positive relationship was confirmed by the transmission of shocks from Total External Debt growth to Gross Domestic Product growth, but it lasted only for two periods and quickly returned to an equilibrium state. The relationship between Gross National Expenditure growth and the other variables was not conclusively established due to its lack of consistent and stable behavior with the other variables. The Stata package “pvar” was employed for data analysis and inferential conclusions.