Public debt and macroeconomic performance: the interaction effect of fiscal vulnerability

Purpose In the recent past, Ghana's public debt became unsustainable, necessitating appropriate debt management strategies to restore economic stability. This study examines the nexus between public debt and macroeconomic performance, focusing on the government's fiscal vulnerabilities as key influencing factors, to reveal how government borrowing affects economic recovery policies. Design/methodology/approach We employ a hierarchical regression model and utilize the least squares method (linear) to analyze time series data (1983–2020) from the World Bank, IMF and Bank of Ghana databases. We further employ a Bayesian linear regression model to enhance the robustness of the analysis. Findings The results depict that public debt relates negatively with GDP, inflation and trade balance, but it relates positively with unemployment. All fiscal vulnerability indicators moderate the association between public debt and both GDP and inflation. Furthermore, all indicators (except external debt to exports and net international reserves to external debt ratios) moderate the relationship between public debt and unemployment. Only debt to domestic revenue ratio and interests to domestic revenue ratio moderate the association between public debt and trade balance. Originality/value The interaction effects reveal intricate relationships between public debt and macroeconomic performance. Our study innovatively applies Bayesian analysis to examine these interactions, offering a more robust and nuanced understanding of the complex dynamics at play and shedding new light on the relationships driving economic outcomes. This informs policymakers’ development of more effective policies that account for these nuanced relationships.