Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283772 
Authors: 
Year of Publication: 
2023
Series/Report no.: 
WIDER Working Paper No. 2023/76
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
This paper examines the role of financial frictions in the public debt-growth nexus, documenting that a public debt shock has different macro-financial implications dependent on the state of financial markets in South Africa. A non-linear vector autoregression model is estimated which allows the transmission mechanism to be characterized by two distinct financial regimes: stressful versus normal. The empirical results suggest that a public debt shock has a broadly insignificant impact on economic growth over the full sample, reflecting the ineffectiveness of government borrowing in stimulating the economy, and could suggest that the high and growing debt service costs faced by the government reduces funds available for investment purposes. Debt shocks are found to be deflationary in both regimes, lending support to the precautionary savings effect and the existence of a well-developed financial market, while interest rates decline with the immediate impact being moderately larger in the stress regime, providing evidence of the accommodative stance between fiscal policy and monetary policy. In response to a public debt shock, financial conditions show an immediate and transitory improvement in the high-stress regime; however, in the low-stress regime there is an immediate yet negligible improvement in financial conditions. Lastly, the responses evolve over time, with fiscal policy being less effective in stimulating the economy in the post-crisis period, but it has been effective in reducing financial stress in the high-stress regime.
Subjects: 
public debt
financial regimes
South Africa
vector autoregression
JEL: 
C32
E62
G10
H63
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-384-0
Document Type: 
Working Paper

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