Does government debt affect private investment?

Abstract

This paper examines the nexus between government debt and private investment in developing market, Ghana. Specifically, we examine the link between external debt, gross domestic product (GDP), net tax, inflation, domestic credit, exchange rate, interest rate, and constitutional government on private investment. We use time series data ranging from the period of 1975 to 2014. Augmented Dickey Fuller test, vector error correction model, and Granger causality are used to test co-integration, long run relationships and the short run relationships, respectively. We find that external debt, domestic credit and constitutional government are positively linked to private investment. GDP, net taxes, inflation, exchange rate, and interest rate are negatively related to private investment in the long run. Our contribution is that external debt crowds in private investment in the long run in the developing country perspective.