Effects of public debt on private investment

Abstract

Most governments of the modern world use borrowed resources to finance their operation related to the infrastructure development or merely current needs. Despite positive sides of financing government operations with debt, modern economic theory, mentions several negative aspects of it. First of all, most economists emphasize on “Debt overhang effect”. This study explores the effect of public debt on private corporate activity in terms of private fixed capital formation in developing countries. The relationship is strongly related to the “debt overhang effect” hypothesis. Analysis is based on the panel auto regression approach, based on data for developing countries. Secondary data over ten year period is taken from WDI database, imf and several scientific papers.