Public Sector Governance, Economic Stability and Mediating Role of Public Debt for World Economies.

Abstract

Several economic theories conclude that the relationship between public sector governance and macroeconomic stability is direct as better public sector governance improves economic stability or reduces macroeconomic instability. However, the literature provides us positive, negative and insignificant relationship between the both. Following the idea, our study aims to evaluate the mediating role of public debt in governance-stability association. For estimation, we have used a panel data of 102 developed and developing nations for the period 1996-2021 and employed one-way random effect estimator for the SUR system, as suggested by Biørn (2014). Our findings show that the public sector governance effectively improves macroeconomic stability through the channel of public debt for developed economies, however in the case of developing economies the role of public debt is quite opposite and relationship is negative. Moreover, public debt contributes positively in maximizing the macroeconomic stability for developed economies and the results demonstrate that well managed and smaller public debt mediates the governance-stability association. In developing economies, the public sector management policy should be reviewed and public debt should be managed at minimum possible level as the developed economies are having a comparatively manageable and constructive public debt. So, it is concluded that public sector governance improves the macroeconomic stability not only directly, but also indirectly through the channel of public sector debt.