THE RELATIONSHIP BETWEEN MACROECONOMIC VARIABLES AND GOVERNMENT DEBT: EVIDENCE FROM MALAYSIA
DOI:
https://doi.org/10.55197/qjssh.v7si4.1594Keywords:
government debt, inflation, crowding-out effect, GDP, interest rateAbstract
This conceptual paper investigates the relationship between selected macroeconomic variables name-ly inflation, investment, interest rates, exchange rates, and gross domestic product (GDP), and gov-ernment debt in Malaysia. Guided by the Fiscal Theory of the Price Level (FTPL), Crowding-out Effect, and Modern Monetary Theory, it aims to develop a theoretical framework to understand how these factors influence government debt levels. A review of existing literature highlights the diverse impacts of these variables across different economies, emphasizing the importance of context-specific analysis for Malaysia. The study proposes employing an Autoregressive Distributed Lag (ARDL) model using annual data spanning between 2002 and 2024. The paper does acknowledge the potential for a crowding-out effect, wherein more government borrowing might limit private investment. Since higher debt levels may impede economic growth, a negative correlation between GDP and government debt is anticipated. Finally, because large budget deficits increase interest rates and the cost of debt repayment, it is anticipated that interest rates and government debt will have a positively significant association. The expected findings may suggest that the relationship between selected macroeconomic variables and government debt is multifaceted with inflation, investment, interest rates, exchange rates, and GDP all playing critical roles. In conclusion, policymakers must navigate these debt dynamics carefully to promote economic stability and sustainable debt levels.
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