PUBLIC DEBT, INSTITUTIONAL QUALITY AND ECONOMIC GROWTH IN EU COUNTRIES IN THE AFTERMATH OF COVID-19 AND WAR-INDUCED CRISIS

Abstract

Public debt and institutional quality are important factors that can influence economic growth in European Union (EU) countries. This study examines the impact of public debt and institutional quality on economic growth in the EU from 2000 to 2021 using the GMM method. Our results showed that some variables are statistically significant across all methods, such as Regulatory Quality, Voice and Accountability, Gross fixed capita, and Population, while others are only significant for some methods or not significant at all. For example, Debt to GDP is significant only in Pooled OLS, Control of corruption is significant in Pooled OLS and GMM, while Government Effectiveness is only significant in FEM. Another important metric is the R-squared value, which indicates the goodness-of-fit of the model, or how much of the variation in the dependent variable can be explained by the independent variables. The R-squared value ranges from 0 to 1, with higher values indicating a better fit. In this case, the R-squared value is highest for Pooled OLS (0.6895), which suggests that this method fits the data better than the other methods. Finally, the table reports some test statistics to evaluate the validity of the model. The Sargan test and Hansen test are used to test the overidentifying restrictions of the GMM estimator, which checks whether the instruments used in the GMM estimation are valid or not. In this case, both tests have p-values greater than 0.05, which suggests that the GMM estimation is valid.  Based on the results, policymakers should focus on improving institutional quality, particularly Regulatory Quality and Voice and Accountability, as these variables are statistically significant across all methods and have a positive impact on economic growth and fiscal sustainability. Also, policymakers should consider controlling public debt levels to ensure fiscal sustainability. Although Debt to GDP is only significant in Pooled OLS, it is still an essential variable to consider as it has far-reaching implications for economic growth and fiscal sustainability. Additionally, policymakers should pay attention to Gross fixed capital and Population, as these variables are also significant across all methods and have a positive impact on economic growth. Therefore, policymakers should focus on improving the investment climate, promoting entrepreneurship, and increasing population growth through targeted policies to enhance economic growth and should pay attention to the goodness-of-fit of the model, as indicated by the R-squared value, to ensure that the chosen method fits the data well. In this case, the Pooled OLS method has the highest R-squared value, indicating a better fit, and policymakers should, therefore, consider using this method for future analyses. Finally, policymakers should ensure that the GMM estimator's instruments are valid by conducting the Sargan and Hansen tests to check the overidentifying restrictions. In this case, the tests' p-values are greater than 0.05, indicating that the GMM estimation is valid. Therefore, policymakers can use GMM estimation to assess the relationship between institutional quality, public debt, and economic growth.