The Effect of National Debt on Private Investment (S/O 14327)

• Main Author: Hassan, Sallahuddin
• Format: Monograph
• Language: English
• Published: UUM 2021
• Subjects: HB Economic Theory
• Online Access: https://repo.uum.edu.my/id/eprint/31579/1/14327.pdf; https://repo.uum.edu.my/id/eprint/31579/

The previous empirical analyses have proved inconclusive findings about the relationship between private investment and national debt. Lack of empirical efforts and the existence of inconsistent empirical evidences of nonlinear relationship between national debt and private investment, particularly in Malaysia, show that the literature on national debt-private investment is still incomplete. This indicates the importance of further empirical analysis on this issue. In Malaysia, the private investment growth rate has significant fluctuation with the average growth rate of 14.26 percent, which is considered as low performance. The persistent increase in the total national debt combined with substantial public financing requirements has created the favourable and unfavourable economic conditions. The general objective of this study is to investigate the impact of national debt on private investment. The specific objectives are to investigate the asymmetric effects of national debt on private investment; analyse the long-run effect of national debt on private investment; and evaluate the short-run effect of national debt on private investment. The Nonlinear Autoregressive Distributed Lag method is applied to investigate the nonlinear relationship between national debt and private investment. Based on the accelerator theories and empirical evidences, national debt, gross domestic product, government investment, national savings, interest rate, inflation rate, fiscal deficit, population growth, trade openness, exchange rate and dummy variables are included in the private investment model. This study uses the annual time-series data for the period 1970 - 2019. This study found that there is a nonlinear relationship between private investment and national debt and justified that national debt significantly influence private investment in the long-run and the short-run. The Malaysian debt policies and Acts need to be changed accordingly and must be in line with the changes of investment environment. National debt needs to be managed without putting at risk economic and financial instability. The government should ensure that the national debts are correctly, prudently and efficiently channeled for achieving the objective of national debts; and determine the appropriate threshold of national debts for expediting the capital accumulation.