The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach

• Published in: Economic modelling 2014-04, Vol.39, p.213-220
• Main Authors: Doğan, İbrahim, Bilgili, Faik
• Format: Article
• Language: English
• Subjects: Algorithms; Borrowing; Budget deficits; Economic development; Economic growth; Economic models; Economic theory; External debt; Growth models; Management science; Markov analysis; Markov Regime-switching model; Middle East; Public debt; State-space; Studies
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2014.02.032

Today, the major reason for external debt is to finance high public deficits. This study aims to examine the relationship between external indebtedness and growth variables. In this context, Markov-switching model is used because it allows the examination of unobservable variables in an observable model and provides steady algorithm to achieve robust optimization by iterations in a dynamic system, and is more flexible than prior models. This paper concentrates on the analysis of Turkey and utilizes the data set for the period of 1974 to 2009. Throughout the analyses, the relationship between growth and external borrowing is examined in terms of public and private external borrowing. Paper yields that, according to results of multivariate dynamic Markov-switching model, the main growth variables such as investment and human capital have positive impact on growth as expected. Findings can be summarized as follows; firstly, public and/or private external borrowing has negative impact on growth both in regime at zero and regime at one. Secondly, the negative impact of public borrowing on economic growth and development is higher than that of private borrowing on economic growth and development. Eventually, the conclusion reveals that the economic development and borrowing variables do not follow a linear path. •The relationship between growth and external borrowing is examined in terms of public and private external borrowing.•The study attempts to estimate the relationship with Markov-switching method.•The conclusion reveals that the economic development and borrowing variables do not follow a linear path.