Investigating the Relationship Between Government Debt Levels and Fiscal Policy Outcomes, Focusing on Debt Sustainability and Growth

Abstract

This study investigates the dynamic interrelationships between government debt and GDP growth. It also take into account the primary fiscal balance, real interest rates, institutional quality, investment, trade openness, and unemployment. The study uses a unified panel vector autoregression (PVAR) framework for a balanced panel of developed and emerging economies. The approach offers comprehensive details of the intricate relationships, for emerging and developed economies, influencing 'fiscal sustainability' and 'macroeconomic stability'. The PVAR(1) model, is validated by relevant stationarity tests and lag-length diagnostics. Subsequent to 'Granger causality testing' ,and 'impulse response estimation', the findings highlight substantial bidirectional relationships. Government debt exhibits inertia but is mitigated by higher growth and stronger primary balances. Fiscal discipline is improved by better institutions and macroeconomic performance. GDP growth is positively shaped by investment, trade openness, and institutional strength. Nevertheless it is constrained by high interest rates and unemployment. These findings highlight the need of a coordinated, policy mix. A policy in which pro-growth initiatives, financial discipline, and institutional improvements all work together. The work offers empirical data for the creation of integrated macro-fiscal policy. For countries controlling the post-crisis recovery, debt restructuring, and long-term economic concerns, the findings are crucial.