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Theoretical and Applied Economics
No. 3 / 2020 (624), Autumn

The effect of external debt on long run economic growth in developing economies: Evidence from heterogeneous panel data models with cross sectional dependency

Muhammed BENLI
Bilecik Seyh Edebali University, Turkey

Abstract. In this paper, we attempt to empirically investigate the impact of foreign debt growth and inflation on long-run economic growth in 35 developing economies over the period 1987-2017. Taking into account heterogeneity and cross-sectional dependence that may present in our panels, we employ cross-sectionally augmented autoregressive distributed lag (CS-ARDL) and crosssectional augmented distributed lag (CS-DL) estimators as well as the traditional panel data estimators such as the dynamic fixed effect (DFE), mean group (MG), and pooled mean group (PMG) estimators. The empirical evidence provided by selected estimators suggests the deteriorating effects of both external debt and inflation on long-run economic growth in the selected countries for the study period. Overall, our analyses provide tentative policy implications for developing economies for managing foreign borrowing and, if necessary, discouraging excessive external borrowing of both the private and public sectors.

Keywords: external debt, inflation, economic growth, panel data models, cross-sectional dependence.

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