The Impact of Public Debt and Quality of Governance on Economic Growth in High-Income Countries

Abstract

Government intervention is imperative in the mixed economic system due to market failures, imperfection, pure public goods, and economic externalities to stabilize the economy. We examine the impact of public debt on economic growth. As the role of quality of governance (QoG) is disputed in prior studies, we examine the direct and moderating role of QoG in the context of high-income countries. Whereas analyses are often based on static models along with conventional quantile regression methods not considering the scale and location, we use the method of moment quantile regression (MMQR) by considering the quantile in both scale and location based on heterogeneous panel data from 1990 to 2020. Our empirical investigation shows that public debt promotes economic growth in lower to upper-medium quantiles but is ineffective in top quantiles. The moderating role of QoG on the debt-growth nexus is counterproductive in lower quantiles and insignificant in upper quantiles, which could be the rationale for the tight QoG rules and regulations. The findings also indicate that the effectiveness of the QoG on public debt is crucial for economic growth in high-income countries, while large public debt and too strict rules and regulations of QoG often slow down the growth process in high-income countries. As policy recommendations, governments should adopt prudent public debt management strategies to balance growth stimulation with the avoidance of excessive debt accumulation. Besides, a moderate QoG framework can be prioritized to effectively moderate the relationship between public debt and economic growth to foster sustainable growth trajectories. Graphical Abstract: (Figure presented.).