Is the effect of public debt on inflation symmetric or asymmetric? Evidence from the Gambia

Abstract

Abstract Several studies have identified the impact of total public debt on inflation. These studies are based on the assumption of a symmetric relationship between these variables. However, because different governments react to changes in total public debt (positive or negative) differently, this study employed the nonlinear autoregressive distributed lag (NARDL) technique to investigate the nature of the link between total public debt and inflation in the Gambia for the period from 1978 to 2019. The results indicate an asymmetric relationship between total public debt and inflation, irrespective of whether the analysis was conducted in the short run or long run. The coefficient of a positive shock in total public debt is statistically significant in the short run and in the long run, suggesting the inflationary effect of positive variation in total public debt in the Gambia. On the other hand, the effect of a negative shock is not statistically significant in the short run or in the long run. These findings reinforce the need for government to approach increase in public debt with caution to minimise volatility in inflation. Overall, this study provides a fresh insight into the optimal estimation technique for testing the public debt–inflation nexus through a nonlinear approach.