Governance and government debt

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João Imaginário, Maria João Guedes ORCID logo

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The continuous increase in debt ratios raises concerns in economic institutions concerning fiscal sustainability and its effect on the world economy. The empirical evidence has shown that both developed and developing countries have become highly indebted and fiscal deficits are not sustainable (Afonso, 2005) As such, the quality of institutions has an important role in debt accumulation (Presbitero, 2008) and fiscal stance is closely related to government institution quality as well as political and social stability (Woo, 2003). However, little attention has been devoted to the relationship between governance quality and government debt. This study examines whether the quality of governance relates to government debt. Using a sample of 164 countries for the period between 2002 and 2015, our results show that governance quality is negatively and statistically related to government debt. For low income countries evidence was found that a better governance environment is associated with lower public debt levels for low income countries, but not for high-income countries.

Keywords: Governance Quality, Government Debt, Low-Income Countries, Panel Data Analysis, Worldwide Governance Indicators

Authors’ individual contribution: Conceptualization – J.I. and M.J.G.; Methodology – J.I. and M.J.G.; Software – J.I.; Validation – J.I. and M.J.G.; Formal Analysis – J.I. and M.J.G.; Investigation – J.I.; Writing – Original Draft – J.I. and M.J.G.; Writing – Review & Editing – J.I. and M.J.G.; Visualization – J.I. and M.J.G.; Supervision – M.J.G.; Project Administration – J.I. and M.J.G.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: We acknowledge research support from Advance Research Center (supported through UIDB/04521/2020 project by FCT – Fundação para a Ciência e a Tecnologia, Portugal). We thank Pedro Pimentel and António for valuable comments.

JEL Classification: C33, C38, H11, H63, O16

Received: 25.06.2020
Accepted: 31.08.2020
Published online: 03.09.2020

How to cite this paper: Imaginário, J., & Guedes, M. J. (2020). Governance and government debt. Risk Governance and Control: Financial Markets & Institutions, 10(3), 34-49.