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The implication of public debt and financial instability on economic growth: A case study of selected West African countries

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posted on 2023-08-30, 17:01 authored by Edafe Otovwe
This research examines the impact of public debt and financial instability on the economic growth of selected West African countries. The effect of public debt on an economy cannot be overemphasised. The amount of public debt that a country owes can either help in increasing the growth rates or it can result in situations that are detrimental to economic growth. Some scholars have argued that when public debt is not properly managed, it can be carried on to future generations by way of compound interest problems. Therefore, it is very important to know how the amount of debt country owes can affect economic activities. Financial stability on the other hand is an important aspect of the economy because most of the decisions taken by policy makers are centred around maintaining stability. This is because financial instability is disadvantageous to the economy. It results in a weakening of investment and economic activities; it leads to a rise in public debt and also affects economic growth in a negative way. The study carried out an extensive literature review on various school of thoughts on public debt and economic growth; it also identified sources of financial stability. A quantitative research approach was adopted for this study and the data was gotten from the World Development Indicators for a period starting from 1970 to 2015. The selected countries were Benin, Burkina Faso, Cote D’Ivoire, Ghana, Mali, Niger, Nigeria, Senegal and Togo. The econometric model for this study was adapted from the theories of business cycle and the statistical tests used for estimation includes the unit root test, leg length criteria, ARDL bounds test, Johansen Cointegration tests, error correction models, granger causality tests, cumulative sum tests, and serial correlation tests. The results revealed that there is a long run relationship between public debt, financial stability and economic growth for the selected West African countries, and the granger causality results mostly indicated a unidirectional causality for the selected West African countries. The results suggested that that government spending is the most effective policy instrument in regulating the level of public debt and financial instability. Based on the econometric findings, this research recommends that fiscal policy is more effective in curtailing the effects of public debt and financial instability on the economic growth of the selected countries.



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