Assessing the Interactive Impact of Governance Quality, Corruption, and Public Debt on Private Sector Capital Formation: Evidence from Pakistan’s Economic Growth Dynamics

Abstract

The present study aims to scrutinize the short-run and long-run implications of government debt on economic growth, with a meticulous focus on the role of governance and corruption indicators as exogenous variables. To estimate the short-run and long-run parameters, the study employs the ARDL (Autoregressive Distributed Lag) modeling approach using time series data covering the period from 1985 to 2021.The estimation results reveal that, in the long run, the interaction term corruption*GDP exerts a significant and positive impact on the model’s endogenous variable, indicating its acceleratory effect on economic growth. Conversely, GDP and Capital Formation/GDP (-1) exhibit negative long-run effects. The findings further suggest that public sector debt has an insignificant impact on economic growth. However, the long-run results highlight the detrimental influence of Debt/GDP, in contrast to the positive and significant effects of Governance*Debt/GDP, Governance*Savings/GDP, and Savings/GDP.