DO STRONG INSTITUTIONS IMPROVE THE EFFECTIVENESS OF MACROECONOMIC POLICIES IN CONTROLLING PUBLIC DEBT? EVIDENCE FROM SOUTH ASIAN COUNTRIES

The aim of this study is to examine the impact of institutional quality on relationship between macroeconomic policies and public debt in South Asian countries. The study investigates the impact of monetary and fiscal policy, institutional quality, macroeconomic conditions on public debt using annual data on Bangladesh, Bhutan, India, Maldives, Pakistan, and Sri Lanka for 2002-2022 period. Three complementary estimation methods using panel data are applied: country fixed-effects, fixed-effects estimation with Driscoll–Kraay standard errors and panel quantile regression at the 25th, 50th, and 75th quantiles. The findings show that the government expenditure is positively related to public debt, whereas the real interest rate is negatively correlated to public debt, and economic growth is negatively related to public debt in all cases. There is some variation in the evidence base of the broad money and tax revenue between estimation methods and the debt regime. Specifically, the tax revenue has a negative relationship with debt in the Driscoll–Kraay specification and at the lowest level of debt quantile, while broad money shows heterogeneous effects across the conditional debt distribution. The link between institutional quality and public debt is consistent and strong across the various fixed-effects, Driscoll–Kraay and all three quantile specifications. The quantile estimates also show that the determinants of public debt are not the same across countries of varying levels of public debt. The results indicate that for good public-debt management in South Asia, expenditure discipline, increased revenue mobilization, pro-growth policies, financing conditions and institutional capacity are needed. The study demonstrates the role of institutional quality in the debt outcomes, and offers policy-relevant evidence on how to improve macro-fiscal management in the developing economies. Keywords: Public debt; institutional quality; fiscal policy; monetary policy; fixed effects; Driscoll–Kraay; quantile regression; South Asia.