Applied Econometrics and International Development Vol.

14-1 (2014)

ON THE IMPACT OF PUBLIC DEBT ON ECONOMIC GROWTH

DAR, Atul A. *
AMIRKHALKHALI, Sal
ABSTRACT
It is generally agreed that the rapid rise of public debt in most of the developed
countries can be traced to the recent financial crisis, and the accompanying slump
contributed to this problem. This has sparked debate about the likely adverse
macroeconomic impacts of persistent large debts especially on long-term economic
growth. In this paper, we attempt to contribute to this debate by examining the impact of
public debt on economic growth in 23 OECD countries classified into four groups in
terms of their average debt-to-GDP ratio over the 1996-2007 period. We use a general
empirical methodology, which is also likely to be better able to represent the law relating
economic growth to its determinants. Our empirical results indicate that the marginal
impact of debt is negative but very small and statistically insignificant in almost all cases.

1. Introduction
The rapid rise in public debt in many developed countries over the past several
years has sparked debate about the likely macroeconomic impacts, especially on long-
term economic growth. While it is generally agreed that the recent problem of debt can be
traced to the financial crisis of recent years, the accompanying slump contributed to this
problem; and, there is fear that large debts will persist because they reflect underlying
structural factors. As a consequence, adverse economic consequences are much more
likely to occur. In general, theoretical considerations point to a negative impact of debt on
growth and some of the empirical literature appears to support that view (Schclarek,
2004). However, more commonly, the empirical literature suggests that debt impacts
adversely on growth only after a threshold is reached – see for instance, Reinhart and
Rogoff (2010, 2011), Caner et al. (2010), Kumar and Woo (2010), Checherita and Rother
(2010), Patillo et al. (2002), and Clements et al. (2003). In general, the estimated
threshold in the empirical studies cited above varies mostly because of different
methodologies. For instance, Caner et al. (2010) considered 101 developing and
developed countries over almost 30 years and found a threshold of 77 percent public
debt-to-GDP ratio, while Reinhart and Rogoff (2010) , in their study of 44 advanced and
emerging countries over a 200-year period, found that public debt has adverse growth
consequences only beyond a debt-to-GDP ratio of 90 percent for these countries. (It
should be noted that despite of acknowledging some errors in their 2010 paper, in a May
2013 errata, Reinhart and Rogoff have left their basic findings unchanged.)
Much of the empirical growth literature uses some variant of the basic aggregate
growth-accounting model developed by Solow (1956), with more generalized approaches
incorporating theoretical insights offered by endogenous growth theory - see, for instance,
Barro (1991), Barro and Salai-i-Martin (1992), Jones (1995), and Mankiw, Romer and
Weil (1992), Dar and AmirKhalkhali (2003). An important feature in such studies is that

*
Atul A. Dar & Sal AmirKhalkhali, Saint Mary’s University, Canada. E-mails: atul.dar@smu.ca
sal.amirkhalkhali@smu.ca
Applied Econometrics and International Development Vol. 14-1 (2014)

economic growth is seen as depending not just on traditional variables like factor
accumulation, but also upon various policy and/or institutional factors. Typically, in such
models, various variables reflecting public policy, trade orientation, and institutional
characteristics, are included as affecting growth via their impact on total factor
productivity – the “Solow” residual. In reality, much of the vast inter-country differences
reflected in economic, political and other institutions are unobserved, but nevertheless are
potentially important for growth. Our empirical methodology outlined below, is ideally
suited to address this and other problems such as endogeneity.
Our study modifies the growth-accounting model used by AmirKhalkhali and
Dar (2012) to examine whether public debt plays a prominent role in explaining
differences in growth rates in 23 OECD countries over the 1996-2007 interval. Unlike
previous studies, which estimate their models using fixed and random effects
methodology, we accommodate unobserved inter-country differences via random
coefficients. Such an approach is a better description of the underlying law relating one
variable to others – in this context, the law relating growth to its determinants, including
debt. We address the growth-debt issue in two ways. First, we estimate our model over
the entire sample using random coefficients estimation, with debt-to-GDP ratios as
additional variables. Since the debt effects are country-specific, we can use these to assess
the nature of the relationship between growth effects and the size of debt-to-GDP ratios.
In the second approach, we classify countries into four groups according to the size of
debt-to-GDP ratios and estimate random coefficients models that are group specific. This
would allow us to assess whether the effect of rising debt varies according to its size. A
large debt-to-GDP ratio can adversely impact on growth via distortions resulting from
higher future taxes to pay interest payments, or via the build-up of more debt, which
would have similar distortionary implications. It would seem therefore, the effects of
debt or fiscal flow variables like government size are similar in terms of their impacts.
The impact of both suggest adverse threshold affects. Thus, rising government size and
debt may both have a positive (or zero) effect on growth at low levels, but a negative
impact beyond some threshold.
The rest of the paper is organized as follows. In Section II, we discuss the model,
the data and the estimation techniques. Section III contains a discussion of our empirical
findings, while Section IV concludes with a summary of the findings.

2. The empirical model, data & estimation

As noted above, the theoretical literature generally points to an adverse impact on
growth of public debt. The arguments in support of this are similar to those for the long
run impact of fiscal variables such as government size. Essentially, an increase in the size
debt-to-GDP ratio, ceteris paribus, implies higher future taxes (on labour and capital).
This can adversely impact on growth via their distortionary static and intertemporal
effects on capital and labour markets. We have already noted that the empirical results on
the effect of public debt point to the existence of “threshold effects” on growth; that is,
the adverse effect on growth operate only beyond some high level of debt. The public
debt threshold is generally found to exist at about 90 percent of GDP, but is likely lower
for other types debt (e.g. external debt) and indeed, as Checherita and Rother (2010) find,
it could be as low as 70 percent of GDP.

22
Dar, A.A., Amirkhalkhali, S. On The Impact of Public Debt on Economic Growth

The existence of a threshold implies that debt would have a positive or neutral
impact below that level. A positive impact can occur up to a point if public debt finances
public capital, as noted by Checerita and Rother (2010), or because of complementarities
between private and some types of public investment (e.g. infrastructure). As well, public
debt can have a positive or neutral effect via a number of other channels. For instance,
public debt can also loosen credit constraints on firms and households, and can thus
crowd-in private investment and hence promote growth (Woodford, 1990). However,
there is considerable agreement that when debt reaches a “high” level and is persistent, as
appears to be the case with many developed countries today, it would harm growth. This
non-linear impact of debt could be characteristic of large governments, since rising and
persistently high levels of government spending drive government budget deficits and
hence debt. Nevertheless, high budget deficits could also be the result of some significant
untimely tax cuts. In light of this, the question of interest is whether the impact of public
debt varies by its size. Specifically, does a rising debt have a positive impact on growth at
low levels of its size and a negative impact at high levels? It is worth noting the rationale
for a permanent growth impact of debt and other fiscal variables is provided by
endogenous growth models. These models imply that long run economic growth can be
permanently altered by policy action that permanently alters the levels of variables (such
as investment rates in physical and human capital), or which affects the country’s rate of
technological advance.
We turn next to the data used in this study. Our sample consists of data for twenty
three industrialized countries which are members of OECD: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland,
the United Kingdom, and the United States. The data span the 1996-2007 interval and
were obtained from various issues of Economic Outlook published by OECD and
International Financial Statistics published by International Monetary Fund (IMF).
Table 1 presents averages of annual growth rates of real GDP (GY), employment
(GE), real gross fixed capital formation (GI), and real exports (GX) as well as the ratios of
investment (IY), government spending (GSY), and public debt (PDY) to GDP for these
countries over the 1996-2007 period. The table classifies the twenty three OECD
countries into four groups in terms of their average size of debt- to- GDP ratios. As can
be seen from the table, the average public debt ratio varies from a low of 17.8% for
Group I countries (Luxembourg, Australia, Norway, Switzerland, and New Zealand), to a
high of 109.6% for Group IV economies (Belgium, Italy, Greece, and Japan). Group II
(Germany, Ireland, UK, Spain, Iceland, and Finland) and Group III (Portugal, Sweden,
Netherlands, Austria, Denmark, France, Canada, and USA) comprise the two
intermediate groups of countries with averages of about 39.9% and 57.6%, respectively.
While Group I has also the smallest size of government, it is Group II that enjoys the
highest average growth rate of GDP, investment and employment. Nevertheless, Group
IV with the highest public debt to GDP ratio has the lowest average growth rate of real
GDP during this period.
Table 2 provides a group-wise bivariate correlation analysis for these
macroeconomic aggregates. The results are somewhat mixed in particular in the case of
the public debt ratio, PDY, which is seen to be negatively correlated with GY for Groups I

23
Applied Econometrics and International Development Vol. 14-1 (2014)

and IV, but this is significant only in the case of Group I. There is a positive correlation
between PDY and GSY except in the case Group IV which is negative and significant.
PDY has also a negative correlation with GE and GI except in the case of Group II. The
negative correlation of PDY and GE is only significant for Group I. The correlation
between PDY and GX is positive but it is only significant in the case of Group II. The
correlation between PDY and IY is negative and significant except for Group IV. It is
also interesting to note the reported negative correlations between GSY and IY in all
cases, which is consistent with the crowding out effect. However, this could also imply
the fiscal policy response to sluggish investment during this period.
In order to go beyond simple correlations, we employ a model that is a
generalisation of the commonly-used growth-accounting model based on the concept of
an aggregate production function. In this model, the rate of economic growth is a
function of capital and labour accumulation and total factor productivity. The standard
growth accounting model involves the following aggregate production function in growth
form:

GYit = 1 + 2GKit + 3GLit + X΄it γ + uit (1)

where GY is the rate of growth of real GDP, GK is the rate of capital accumulation, GL is
the rate of growth of labour, X is a set of other variables, γ the associated vector of
coefficients, while u is the disturbance term. The subscripts i (i=1,2,...,N) and t
(t=1,2,...,T) index the countries and time periods in the sample, respectively. The X
variables can be seen as those observed variables that impact on growth through total
factor productivity. Generalizations of the model are usually generated by identifying
measurable variables that capture the economic and/or political structure of a country, and
which affect growth via total factor productivity. In this study, our generalization models
total factor productivity as depending upon the rate of export growth (GX) and the public
debt to GDP ratio (PDY), as well as upon other unmeasured differences across countries.
In the absence of capital stock data, we use the growth rate of investment (GI) as a valid
proxy variable for GK. In fact, GI closely captures the wide fluctuations in investment
activity compared to investment rate which changes only slowly and shows relatively less
variation across countries. In this study, we also use the growth rate of employment (GE)
rather than that of total labour force (GL) because, given the existence of persistent
episodes of unemployment in these countries over the sample period, employment more
accurately captures the extent of labour utilization. As a result, the above model can be
rewritten as:

GYit = 1 + 2GIit + 3GEit + α4GXit + α5PDYit + uit (2)

In recent years, this type of model has become a popular one for studying the
determinants of economic growth rate. However, a significant problem with a
structural model such as (2) is the endogeneity of the explanatory variables. For instance,
it is hard to ignore the endogeneity arising from the bi-directional relationship between
GY and PDY. This means that a standard interpretation of the estimated parameters is
problematic because of the correlation between explanatory variables and the error term.
Further, in the above model, inter-country differences are assumed away by virtue of the

24
Dar, A.A., Amirkhalkhali, S. On The Impact of Public Debt on Economic Growth

assumption that all coefficients are the same across countries. This is a questionable
assumption a priori; at least one that should be treated as a testable proposition. We
overcome both problems by adopting the more general random coefficients model which
permits us to treat the fixed-coefficients assumption as a testable proposition. In addition,
the random coefficients model can be seen as a refinement of the stochastic law relating
economic growth to its main determinants [see Pratt and Schlaifer (1984, 1988)]. For
this purpose, we postulate that

GYit = 1 + 2GIit + 3GEit + α4GXit + α5PDY it + Wit' (3)

here W is the set of excluded variables that along with those that are included are
sufficient to determine GY. However, in the linear, deterministic law stated by (5),
neither the slope coefficients nor W are unique in that they are sensitive to the
parameterization chosen. To ensure uniqueness, we also postulate

Wit = 1i + 2iGIit + 3i GEit + 4iGXit+ 5iPDYit + eit (4)

Substituting (6) into (5) yields

GYit = 1i + 2iGIit + 3iGEit + 4iGXit + 5iPDYit + vit (5)

With 1i' + 2i'3i'4i'5i', and vit

=eit'.

Note that (5) is a random coefficients model, and that the disturbance is not the joint
effect of excluded variables; instead, it is the joint effect of the remainder of the excluded
variables after the effect of included variables has been factored out. Note also that
although the included variables cannot be uncorrelated with every variable that affects
GY, they can be uncorrelated with the remainder of every such variable (see Pratt and
Schlaifer,1988). Thus, each of our explanatory variables can be uncorrelated with u, and
this regression model can be taken to represent the law relating GY to its determinants.
The varying coefficients model represented by (5) also accommodates inter-country
heterogeneity. In this study, these regression models are estimated using Swamy and
Swamy-Mehta random generalized least squares (RGLS) estimators. For more details of
the RGLS estimation methods, see Swamy (1970), Swamy and Mehta (1975), and
Swamy and Tavlas (1995, 2002).
We first estimate the random coefficients model for the pooled sample. This
allows debt to affect growth via its impact on total factor productivity. We then classify
countries into four groups according to the relative size of public debt and estimate the
model for each group separately. This allows the impact of debt and other determinants of
growth to vary by the debt level; alternatively, this is equivalent to allowing public debt
to affect growth via its impact on individual factor productivity and total factor
productivity.

25
Applied Econometrics and International Development Vol. 14-1 (2014)

3. Empirical results
Table 3 contains the results based on the pooled sample - that is, 23 countries
over the 1996-2007 period, estimated using the Swamy RGLS technique. The validity of
the random coefficients model can be tested using the Swamy’s g-statistic which follows
a distribution, see Swamy (1970) for more details. Note first that the g-statistic is
statistically significant at the 5% level, thereby vindicating the random coefficients
model. The investment, employment, and export growth rates coefficients have the
expected positive sign and are each statistically significant at the 5 percent level. The
public debt coefficient is negative but not statistically significant.
To assess whether and to what extent these aggregate results mask inter-country
and/or group-specific differences, we first look at the country-specific and then group-
wise estimates of the model, obtained using the Swamy-Mehta (1975) RGLS method.
The country-specific estimates are reported in Table 4. The investment growth rate has a
statistically significant positive impact on the growth performance for all countries except
Luxembourg. In the case of the employment growth rate, the positive impact is
statistically significant for most countries in Group I but for only about half of countries
in the other three groups. The export growth rate is also a significant contributor to
growth performance for all countries except Australia, Norway (Group I), UK, Spain
(Group II), Portugal (Group III), and Greece (Group IV). In the case of public debt ratio,
the impact of PDY on growth is negative and statistically significant only in the cases of
Luxembourg (Group I) and USA (Group III). For the rest of the countries, the size of the
PDY coefficient is very small and its sign is positive (but insignificant) in almost half of
the countries in each group.
Table 5 presents the group-wise results using the random coefficients GLS
estimator. The reported g-statistic is statistically significant at the 5% level for each
group, thereby supporting the random coefficients model. The results show that the
impacts of investment, employment and export growth rates are positive for all four
groups. The contributions of investment and export growth rates are significant in all
cases but the impact of employment growth rate is only statistically significant for Group
III at the 10% level. The impact of public debt is negative for all groups but not
statistically significant. Group I shows the largest negative impact of the public debt ratio.
However, this group contains Luxembourg and also some relatively small countries, In
light of their small size, the negative impact of debt for Group I is not surprising. The
negative but small, insignificant impact of the debt ratio in Groups II and III is also not
surprising because both groups are below or at par of the 60% limit (set by the European
Union). What is interesting is the insignificance of the impact of the debt ratio in Group
IV. In other words, these results appear not to lend support to the debt threshold
hypothesis. As well, it is interesting to note that the marginal impact of debt is very small
in all cases.

4. Summary and concluding remarks

In this paper, we attempted to empirically investigate the impact of public debt on
economic growth for a group of 23 industrialized countries within a production function
framework in a much more general manner than previous studies. To this end, we
classified the countries into four groups in terms of their public debt-to-GDP ratio. We

26
Dar, A.A., Amirkhalkhali, S. On The Impact of Public Debt on Economic Growth

also developed the estimating model so that it more accurately represented the law
relating the rate of economic growth to its determinants. The random coefficients
approach is particularly suited here since, as stressed by the political economy literature,
institutional factors are likely to play a major role in explaining inter-country differences
in growth rates. In other words, a random coefficients treatment appears to be a more
reliable way of taking these factors into account than models that try to quantify them.
We first estimated the random coefficients model for the pooled sample, allowing debt to
affect growth via its impact on total factor productivity. We found that the public debt
coefficient was negative but small and not statistically significant. In the case of the
country-specific estimates of the model, the impact of the debt-to-GDP ratio on growth
was mixed but still insignificant for all countries except Luxembourg and the USA. In
these two cases, the debt coefficient was negative and statistically significant. We then
estimated the group-wise model. Note that this allows the impact of debt and other
determinants of growth to vary by the debt level; alternatively, this is equivalent to
allowing public debt to affect growth via its impact on individual factor productivity and
total factor productivity. Our group-specific results were mixed. The impact of public
debt was negative for all groups but not statistically significant. The negative but
insignificant impact of the debt ratio for Groups I, II and III do not seem that surprising
because these groups are below or at about the somewhat reasonable debt ratio limit of
60%. However, the insignificance of the impact of debt ratio in Group IV seems quite
interesting. The small marginal impact of the debt ratio on growth would appear not to
support the debt threshold hypothesis.
These results have important fiscal policy implications. While fiscal discipline
could be an important long term objective of policy makers, the timing of its
implementation seems to be crucial. Within this context, our empirical results lend strong
support to the view that at a time of sluggish growth, the appropriate fiscal policy would
appear to be a demand-oriented growth strategy to deal with demand uncertainties, and
this might require more deficit spending and borrowing. Nevertheless, a key factor in
being able to implement this stimulative policy would depend upon governments’ will, as
well as their ability to borrow at reasonably affordable interest rates.

References
AmirKhalkhali, S. and A. Dar (2012), On Explaining Inter-Country Differences in
Economic Growth Rates: Does Regulatory Quality Matter? Journal of Applied
Econometrics and International Development, Vol. 12-2, 2012, 41-50.
Barro, R. J. (1991), Economic Growth in a Cross Section of Countries, Quarterly Journal
of Economics,106: 407-33.
Barro, R and X. Sala-i-Martin (1992), Convergence, Journal of Political Economy, 100:
223-51.
Caner, M., Thomas Grennes, and Friederike Köhler-Geib (2010), “Finding the Tipping
Point - When Sovereign Debt Turns Bad,” Policy Research Working Paper,
WPS5391 (July), The World Bank.
Chari, V.V., and Patrick J. Kehoe (2006), “Modern Macroeconomics in Practice: How
Theory is Shaping Policy,” Journal of Economic Perspectives, 20(4):3-28.

27
Applied Econometrics and International Development Vol. 14-1 (2014)

Checchetti, Stephen G., M.S. Mohanty, and Fabrizio Zamplolli (2011), “The Real Effects
of Debt,”BIS Working Papers, No. 52, Bank for International Settlements.

Checherita, C. and P. Rother (2010), “The Impact of High and Growing Government
Debt on Economic Growth: An Empirical Investigation for the Euro Area,”
Working Paper Series, No 1237 (August), European Central Bank.
Clements, B., R. Bhattacharya and T.Q Nguyen (2003), “External Debt, Public
Investment, and Growth in Low-Income Countries,” IMF Working Paper,
03/249.
Dar, A. and S. AmirKhalkhali (2003), On the Impact of Trade Openness on Growth:
Further Evidence from OECD Countries, Applied Economics, 2003, 35: 1761-66.
Jones, C.I. (1995), Time Series Tests of Endogenous Growth Models, Quarterly Journal
of Economics, 110: 495-525.
Kumar, M. and J. Woo (2010),”Public Debt and Growth,” IMF Working Paper, 10/174.
Mankiw, N.D., P. Romer, and D. Weil (1992), A Contribution to the Empirics of
Economic Growth, Quarterly Journal of Economics, 107: 407-37.
Patillo, C., H. Poirson, and L. Ricci (2002), “External Debt and Growth,” IMF Working
Paper, 02/69.
Pratt J. W. and R. Schlaifer (1988), “On the Interpretation and Observation of Laws,”
Journal of Econometrics 39, 23-52.
Reinhart, Carmen M. and Kenneth S. Rogoff, “Growth in a Time of Debt,” American
Economic Review, 100(2): 573-78.
Reinhart, Carmen M. and Kenneth S. Rogoff, “The Forgotten History of Domestic Debt,”
Economic Journal, 121(552: 319-50.
Solow, R.M. (1956), A Contribution to the Theory of Economic Growth," Quarterly
Journal of Economics, 70: 65-94.
Swamy, P.A.V.B., (l970), “Efficient Inference in a Random Coefficients Regression
Model.” Econometrica 38, 3ll-23.
Swamy, P.A.V.B. and Mehta, J.S., (1975), “Bayesian and Non-Bayesian Analysis of
Switching Regressions and of Random Coefficient Regression Models.” Journal of the
American Statistical Association 70, 593-602.
Swamy, P.A.V.B.and G.S. Tavlas, (1995), Random Coefficient Models: Theory and
Applications. Journal of Economic Surveys, 165-196.
Swamy, P.A.V.B., and G.S. Tavlas, (2002), Random Coefficient Models in Companion to
Theoretical Econometrics, edited by B.H. Baltagi. Basil Blackwell, 410-428.
Woodford,M. (1990),”Public Debt as Private Liquidity,” American Economic Review,
50(2): 382-88.

28
 Dar, A.A., Amirkhalkhali, S. On The Impact of Public Debt on Economic Growth

TABLE 1. Average Annual Growth of Output (GY), Employment (GE), Investment (GI),
Exports (GX); and Government Spending (GSY), Investment (IY),
and Public Debt to GDP ratios (PDY), 1996-2007

Groups GY GE GI GX GSY IY PDY

Countries
Group I
Luxembourg 4.67 3.79 6.26 2.03 39.78 21.96 7.20
Australia 3.53 0.66 5.50 -2.50 35.19 21.75 9.40
Norway 2.85 1.51 5.86 -3.39 44.9 20.59 19.0
Switzerland 1.98 1.00 1.99 -0.69 34.79 21.79 25.9
New Zealand 2.97 1.90 4.33 -0.30 39.84 23.05 27.9
Average 3.20 1.77 4.79 -0.97 38.90 22.90 17.85
Group II
Germany 1.53 0.51 1.40 0.72 46.98 18.27 33.6
Ireland 6.46 1.13 7.00 3.53 35.02 24.63 34.9
UK 2.76 1.09 4.42 -1.96 41.83 17.26 38.5
Spain 3.48 3.69 5.35 -0.08 39.75 28.38 42.9
Iceland 4.40 3.93 9.38 -0.52 43.76 24.80 43.2
Finland 3.55 1.42 5.05 0.35 50.85 20.93 46.9
Average 3.70 1.96 5.43 0.34 43.03 21.87 39.86
Group III
Portugal 2.16 1.29 2.49 -1.91 44.83 24.72 54.7
Sweden 2.76 1.11 4.64 -0.19 56.67 18.38 55.7
Netherlands 2.75 1.76 3.58 -0.30 46.18 20.20 56.4
Austria 2.50 2.08 1.54 0.03 51.95 23.01 57.4
Denmark 1.87 0.65 3.87 -1.22 54.05 21.19 58.4
France 2.09 1.10 3.52 0.35 52.87 20.40 61.4
Canada 3.01 1.96 5.72 -3.18 41.64 21.21 62.0
USA 2.98 1.19 3.87 -1.54 35.82 19.53 62.7
Average 2.52 1.39 3.65 -0.99 48.01 21.11 57.59
Group IV
Belgium 2.20 1.36 3.26 -1.71 50.18 21.51 97.8
Italy 1.28 1.80 2.16 -4.48 48.55 21.03 107.6
Greece 3.74 1.42 5.75 -0.18 44.96 22.04 107.4
Japan 1.16 -0.08 0.15 -1.45 37.92 23.75 125.7
Average 2.09 1.12 2.83 -1.95 45.41 22.03 109.60

Overall Average 2.90 1.57 4.22 -0.81 44.28 21.76 53.4

29
Applied Econometrics and International Development Vol. 14-1 (2014)

TABLE 2 . Group-Wise Correlation Analysis

Groups Variables GY GE GI GX GSY IY PDY

Group I GY 1
GE 0.479* 1
GI 0.534* 0.291* 1
GX 0.321* 0.342* -0.009 1
GS 0.017 0.041 0.078 -0.073 1
-
IY 0.198 0.051 0.193 -0.231 0.411* 1
- - -
PDY 0.324* 0.314* -0.148 0.020 0.126 0.403* 1

Group II GY 1
GE 0.289* 1
GI 0.626* 0.395* 1
GX 0.375* -0.113 -0.149 1
- - -
GS 0.471* 0.236* 0.240* -0.063 1
-
IY 0.314* 0.474* 0.187 -0.054 0.390* 1
-
PDY 0.187 0.170 0.111 0.239* 0.361* 0.266* 1

Group GY 1
III GE 0.538* 1
GI 0.746* 0.453* 1
GX 0.109 0.077 -0.109 1
GS -0.178 -0.189 -0.083 0.293* 1
-
IY 0.062 0.343* 0.035 -0.111 0.197* 1
-
PDY 0.095 -0.145 -0.005 0.107 0.021 0.310* 1

Group GY 1
IV GE 0.339* 1
GI 0.655* 0.350* 1
GX 0.356* -0.146 0.193 1
GS 0.049 0.343* 0.120 -0.176 1
-
IY -0.050 -0.205 -0.087 0.092 0.673* 1
-
PDY -0.084 -0.195 -0.090 0.089 0.461* -0.044 1
* significant at the 5% level.

30
 Dar, A.A., Amirkhalkhali, S. On The Impact of Public Debt on Economic Growth

TABLE 3. Pooled Results: Random Coefficients GLS

Model: GYit 2i(GI)it +3i (GE)it +4i (GX)it +5i (PDY)it +uit

Countries     


All
1.994* 0.186* 0.248* 0.127* -0.006
0.916 0.023 0.119 0.033 0.038

g-statistic = 314.3*
* and ** indicate statistical significance at the 5% and 10% level, respectively.

TABLE 4 . Country-specific Results: Random Coefficients GLS

Model: GYit 2i(GI)it +3i (GE)it +4i (GX)it +5i (PDY)it +uit
    
Countries        

Luxembourg 2.890* 0.053 0.678* 0.151* -0.487*
Australia 2.015* 0.076* 0.117 0.008 0.106
Norway 0.576 0.083* 0.272* 0.042 0.084
Switzerland 1.431 0.244* 0.252* 0.204* -0.002
New Zealand 1.106 0.202* 0.258* 0.156* 0.021

Germany 1.673* 0.237* 0.046 0.232* -0.017

Ireland 1.110 0.286* 0.468* 0.224* 0.019
UK 3.119* 0.147* 0.204 0.022 -0.031
Spain 2.105* 0.176* 0.218* 0.055 -0.008
Iceland 3.230* 0.097* 0.312* 0.143* -0.023
Finland 1.838* 0.216* 0.226 0.103* 0.005

Portugal 3.440* 0.197* 0.092 0.071 -0.032

Sweden 0.986 0.223* 0.091 0.136* 0.012
Netherlands 2.017 0.213* 0.328* 0.140* -0.010
Austria 0.465 0.239* 0.392* 0.120* 0.015
Denmark 0.111 0.203* 0.105 0.080** 0.021
France 3.295 0.191* 0.206 0.060** -0.034
Canada 0.531 0.197* 0.706* 0.146* 0.024
USA 3.152* 0.268* 0.032 0.162* -0.080*

Belgium 2.008 0.161* 0.307* 0.145* -0.09

Italy 0.330 0.258* 0.051 0.199* 0.025
Greece 2.145 0.113* 0.005 0.022 0.02
Japan 2.744 0.193* 0.390** 0.177** -0.034
* and ** indicate statistical significance at the 5% and 10% level, respectively.

31
 Applied Econometrics and International Development Vol. 14-1 (2014)

TABLE 5
Group-wise Results: Random Coefficients GLS
Model: GYit 2i(GI)it +3i (GE)it +4i (GX)it +5i (PDY)it +uit
Groups      g-
statistics

I 2.004 0.132* 0.315 0.112** -0.056 46.89*

II 2.179* 0.193* 0.397 0.130* -0.009 104.5*

III 2.117 0.216* 0.244** 0.114* -0.011 79.25*

IV 2.807 0.181* 0.186 0.136* -0.020 30.28*

* and ** indicate statistical significance at the 5% and 10% level, respectively.

Journal published by the EAAEDS: http://www.usc.es/economet/eaat.htm

32