The Role of Public Debt in Economic Growth: An Empirical Analysis Evidence for Western Balkans and European Countries

Abstract

Public debt was often considered as a supplementary source of public finances. In six Western Balkan states, a fixed regression model was employed to gauge the effect of public debt on economic growing using panel data. Findings demonstrate that public debt significantly affects economic growth. It was found too that direct foreign investments have a substantial influence into the economic growth. As an option for financing, state governments use external and internal public debt, which is often part of the debate approximately how much public debt should be used. Use of public debt varies from country to country and depends on economic growth and budgetary factors and economic and social demands. Reviewing the literature, it can be observed impact of public debt on overall economy and its growth and this was too used by states as an opportunity for economic growth. This is also reflected in the case of our study where we analyzed the data for EU member countries and Great Britain compared to the Western Balkans countries. During the research it is observed influence of public debt in economic growth on these countries and as such many states have exceeded the limits of the use of public debt based on legal frameworks, with the sole purpose of financing public demands and influence of economic growth. Public debt in this paper identifies the affiliation with economic growth through the specification of linear and non-linear time series models using the panel model for the years 2012-2021 for 35 countries in total. Also, the regression analysis shows us a support and correlation among public debt versus economic growth of countries part of this study. This is observed in developed countries, which have a higher potential and possibility of financing economic activity through public debt, while the Western Balkans countries are often challenged with the possibilities of financing from public debt. As variables we have GDP, Foreign Direct Investments and Inflation.