Is Public Debt Inflationary in Developing Countries? New Empirical Insights from a Panel Data Analysis

Abstract

The issue of reverse causality between public debt and inflation has regained the center stage among policymakers and academicians amid rising pubic debt ratios and inflationary pressures, particularly in developing countries. This study, thus, aims to examine the causality between public debt and inflation in a sample of 39 developing countries over the period 1990-2020. Employing panel granger causality test, results of the study show that inflation granger causes public debt in developing countries. Splitting the sample as lower middle-income economies and upper middle-income economies, the study finds bidirectional causality between public debt and inflation; that is, public debt and inflation in fact reinforces each other over the sampled years. Segregation of the public debt and inflation as high vs low, the study finds that public debt is inflationary in the whole sample and upper middle-income economies. However, the study notes that while low inflation granger causes public debt in the whole sample and lower middle-income economies, there exists bidirectional in the upper middle-income economies. The benchmark results remain unaltered in robustness check exercise. The study has important policy implications for the sampled developing countries in terms of public debt management, achieving stable inflation and sustained economic growth.

Keywords:

• Public debt
• inflation
• causality
• economic growth

JEL classification:

• O40
• E31
• H63

Conflict of interest

The authors declare no conflict of interest.

Data Availability Statement

The data used in the analysis of this paper are openly available at the UNCTAD, IMF and World Bank’s WDI. The data, however, can also be obtained from the authors upon reasonable request.

Notes

1 Besides testing the causal link between public debt and inflation, we also test the causal relationship between public debt/inflation and output growth. Furthermore, we categorize public debt, inflation and economic growth as high vs low and test the causal links among them. We believe that it is too early to discuss the additional causality tests and leave it for discussion in the main empirical results section.

2 The causality tests developed under the Granger’s (1969) seminal work, the later studies developed the causality tests within different frameworks but each study had their own merits and demerits (Xiao et al., 2022).

Additional information

Funding

This research has NOT received any funding from any person/organization.