Does Public Debt Matter? Empirical Evidence From Canadian Provinces

Title: Does Public Debt Matter? Empirical Evidence From Canadian Provinces
Authors: Uwizeyimana, Jean-Marie
Date: 2014-05-15
Abstract: It has always been a major priority for policy makers to know whether national debts are fiscally sustainable. The purpose of this research is to investigate the impact of public government debt levels (debt as a share of GDP) on per-capita GDP growth in the ten Canadian provinces. Using panel data from 1989 to 2008 and the standard two-stage least squares approach (IV/ 2SLS) as well as GMM estimation, the study concludes that public debt is inversely related to the growth rate of GDP per capita. Consistent with other existing studies, this paper also shows evidence that debt levels are nonlinearly associated to economic growth with a debt turning point estimated to be around 40% of GDP on average. This threshold may seem small compared to an average of 80-90% that has been reported in previous studies but it would be both irrelevant and misleading to make such a comparison. This is because the analysis in this paper is based on net financial debt (the difference between total financial assets and total liabilities) and not gross debt. Therefore, given how significant the gap between gross debt and net debt can be, the debt turning point estimated in this study is not small per se. Generally, this empirical work serves as a wake-up call to the provincial governments to start handling their fiscal management. Key words: Economic Growth, Per capita GDP Growth, Public Net Debt Canadian Provinces, Nonlinear.
CollectionScience économique - Mémoires // Economics - Research Papers