External Public Debt and Economic Growth: Empirical Evidence from...

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External Public Debt and Economic Growth: Empirical Evidence from Bangladesh, 1974 to 2010

By | December 2012
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ISSN-L: 2223-9553, ISSN: 2223-9944

Vol. 3, No. 2, September 2012

Academic Research International

EXTERNAL PUBLIC DEBT AND ECONOMIC GROWTH: EMPIRICAL EVIDENCE FROM BANGLADESH, 1974 TO 2010 Mahmud Hasan Shah Department of Economics, Jagannath University, BANGLADESH. mhs_ju@yahoo.com Shahida Pervin Department of Economics, Jagannath University, BANGLADESH. Spervinruby@yahoo.com

ABSTRACT
This research paper investigates the relevance of the dependence of Bangladesh economy on external public debt. Using some econometric tools, the study is conducted to find out the effect of external public debt on economic growth from the perspective of Bangladesh economy for the period 1974 - 2010. The study will probe debt overhang and crowding out effect of external public debt to represent the effect. To specify the debt overhang and crowding out effect of external public debt, the debt burden has been segmented into two part; external debt stock and external debt service. Long run significant negative effect of external public debt service and positive effect of external public debt stock on GDP growth have been found from this investigation. In short run, only external debt service has negative effect but the debt stock does not have any significant effect. Thus the investigation did not find any evidence of debt overhang provided that there is no significant adverse effect of debt stock on GDP growth. But crowding out effect was originated from the fact that there is evidence of adverse effect of debt service payment on economic growth for the period. As more debt stock means more service payment, the study shows a dichotomy in obtained results. So the reconciliation of debt should be prudent to optimize the growth of Bangladesh. Short run disequilibrium in the path of long run is corrected at a good speed. Keywords: Crowding out effect, cointegration, debt overhang, external public debt, error correction mechanism.

INTRODUCTION It is a contentious issue...