The effect of corruption on public debt sustainability: Evidence from the European Union’s countries

Abstract

Corruption has significant implications for economic development and stability. It distorts market mechanisms, undermines public trust, and hampers investment and economic growth. Understanding the impact of corruption on the economy helps policymakers design effective anti-corruption measures and promote good governance. The dearth of studies examining the influence of corruption on the relationship between public debt and economic growth is the research challenge that the study addresses. Numerous studies have investigated the association between economic growth and public debt, but few have explored the impact of corruption on these variables. Our research aims to fill this gap by examining the impact of corruption on the connection between economic growth and public debt. To achieve this, we employed a dynamic panel generalized method of moments models (Arelleno & Bover, 1995) and fixed effects models using data from 28 countries spanning from 2012 to 2019. The empirical results show that there is a statistically significant interaction term between debt sustainability and corruption. This supports the idea that the impact of public debt on economic growth is a function of corruption, with a negative sign for the marginal effect. Therefore, public debt hinders economic growth in corrupt nations.