The laffer curve and the debt-growth link in low-income Sub-Saharan African economies

Research output: Contribution to journalArticle

Abstract

The study of the link between debt and growth has been full of debates, both in theory and empirics. However, there is a growing consensus that the relationship is sensitive to the level of debt. Our paper tries to address the question of non linearity in the long term relationship between public debt and economic growth. Specifically, we set out to test if there exists an established ‘laffer curve’ type relationship, where debt contributes to economic growth up to a certain point (maximal threshold) and then starts to have a negative effect on growth afterwards. To carry out our tests, we have used a methodology that delivers a superior test of bell shapes, in addition to the traditional test based on a regression with a quadratic specification. The results show evidence of a bell-shaped relationship between economic growth and total public debt in a panel of low income Sub-Saharan African economies. This supports the hypothesis that debt has some positive contribution to economic growth in low-income countries, albeit up to a point. If debt goes on increasing beyond the level where it would be sustainable, it may start to be a drag on economic growth.
Original languageEnglish
Pages (from-to)878-892
Number of pages15
JournalJournal of Economic Studies
Volume42
Issue number5
DOIs
Publication statusPublished - Oct 2015

Fingerprint

Laffer curve
Debt
Economic growth
Africa
Low income
Public debt
Methodology
Public economics
Empirics
Nonlinearity
Low-income countries
Long-term relationships

Keywords

  • public debt
  • economic growth
  • laffer curve
  • low-income countries
  • Sub-Saharan Africa

Cite this

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The laffer curve and the debt-growth link in low-income Sub-Saharan African economies. / Megersa, Kelbesa.

In: Journal of Economic Studies, Vol. 42, No. 5, 10.2015, p. 878-892.

Research output: Contribution to journalArticle

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