Empirical analysis of country-level institutional quality and public debt: Perspective of South Asian countries

Abstract

Purpose –Present study inspects the effect of country-level institutional quality on public debt in the South Asian nations of India, Pakistan, Bangladesh, Nepal, Bhutan, and Sri Lanka. Methodology – Present study focuses on the South Asian region’s public debt from the angle of country-level institutional quality data from 2002 to 2018. It employs a dynamic heterogeneous panel approach, known as panel autoregressive distributed lag (panel ARDL) model entailing “dynamic fixed effect (DFE), mean group (MG), and pooled mean group (PMG)”. Findings - Findings of the study suggest that governance indicators, namely political stability and control of corruption are negatively significant to explain public debt. While government effectiveness and rule of law have significant and positive effect on public debt. The long-run estimates seem to be homogenous for all the reviewed countries. However, the short-run estimates and the adjustment speeds to the long-run equilibrium are heterogeneous, which could be attributed to volatile governance in each of the cross-section countries. Practical implication - Policymakers can benefit tremendously from the study’s findings, especially for countries experiencing significant fiscal and external imbalances caused by major war and terrorism implications, low oil prices, and poor trade. There is an urgent need to focus on public

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