Fiscal Policy, Institutional Quality, and Public Debt: Evidence from Transition Countries

Abstract

This research makes a significant contribution to the literature on the economic implications of fiscal policy and institutional quality by modeling empirically the impact of these factors on public debt in 27 transition countries over the period 2000–2018. Applying Ordinary Least Squares (OLS), Random effects, and two-step GMM methods, the research gives evidence to confirm the background theory that deducing public expenditure and improving government revenue could push government debt lower. The main findings especially demonstrate that institutional quality contributes to making an impact on public debt. Particularly, weak governance in controlling corruption leads to higher accumulation of public debt while financing to improve the institutional quality in relation to government effectiveness, regulatory quality, and rule of law after changes in the regime in those countries increases the size of public debt. The results of this paper convince policymakers of crucial implications of both fiscal policy and institutional quality in managing public debt.