All Theses and Dissertations

Degree

Master of Science in Economics

Faculty / School

School of Economics and Social Sciences (SESS)

Department

Department of Economics

Date of Award

Spring 2021

Advisor

Dr. Qaiser Munir

Committee Member 1

Dr. Qaiser Munir, Institute of Business Administration, Karachi

Project Type

Thesis

Access Type

Restricted Access

Pages

ix, 40

Abstract

The global recession of 2007–2008, followed by the Eurozone crisis in 2009 and the unconventional monetary and fiscal policies, has generated an extraordinary surge in public debt levels throughout the developing countries, raising serious concerns about its economic impact on countries, like Pakistan. This paper has two key objectives: first, it explores the nonlinear relation between public debt and the economic performance of Pakistan; and second, it estimates the debt to GDP threshold in Pakistan, for the period 1970-2019. Unlike many previous studies, we investigate the non-linearity between the growth–debt relationship implementing non-linear specifications, applying novel methodologies and diagnostics from the time-series literature adapted. Specifically, we employ the nonlinear autoregressive distributed lag (NARDL) model, suggested by Shin et al. (2014), to assess the asymmetric effect of debt on growth, then the asymmetric causality test proposed by Hatemi-J (2012) and the threshold auto regression (TAR) framework by Hansen (2000). Empirical results highlight the existence of nonlinearity between Pakistan’s public debt-growth nexus and indicate that it exhibits asymmetries in the long run. The results show that negative shocks to the public debt to GDP ratio have a positive effect on the economic growth of Pakistan. Furthermore, results obtained from the asymmetric causality test indicate a uni-causal relation running from the negative partial sum of public debt to the GDP growth of Pakistan. In addition, this paper estimates the threshold level of public debt as a percentage of GDP to be 60.7%, beyond which debt has a detrimental impact on growth rates. Our finding unveils an inverted U-shaped relationship between the debt and the economic growth rate with the debt turning point at about 60.7%. More importantly, the results show that the estimated debt threshold of 60.7% is quite contrasting to most of the research papers which have estimated the debt-to-GDP tipping point to lie in the range of 75% to 100%. The outcome of the study has important policy implications and may be useful to design appropriate policies to curb the debt burden of the country.

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