The Effect of Public Debt on the Economic Growth of Jordan

Abstract

The aim of this study was to investigate the structure of public debt in Jordan and its impact on economic growth, over the period 1980-2012. The statistical techniques which were employed in this study included Johanson co-integration test, Vector Error Correction Model (VECM) to explore the association between domestic debt and external debt ratio of GDP as independent variables and the total debt relative to GDP as the dependent variable. Fully modified least squares (FMOLS) approach also employed in order to describe the impact of internal and external debt on economic growth. The co-integration test procedure reveals that there is one relationship; consequently an (VECM) was estimated revealing that 9% of the departure from equilibrium is cleared annually, and the results of Causality test showed that independent variables have Uni-directional relationship with the total debt as the dependent variable. Based on regression coefficient, it was found that external debt has a negative influence, and domestic debt has positive influence on economic growth. The study recommended that the external debt must be re-oriented toward invested in productive projects in order to the burden of debt service

Keyword: Public Debt, GDP, Fully Modified Least Squares, Cointegration.

DOI: 10.7176/RJFA/10-1-09