Author(s): Suresh Govindapuram
Many studies have analyzed the relationship between public debt and financial inclusion, but only some, if any, have explicitly focused on the factors that shape financial inclusion and public debt. This paper draws on the trove of financial and debt-related data from Word Bank to examine the factors influencing public debt. Using a dynamic panel data model for a sample of 145 countries, the study suggests that public debt has an indirect link with financial inclusion and that this link is robust across specifications. This result aligns with previous studies that have indicated the possibility that public debt “crowds out” private activity. More significant levels of public debt are likely to draw out resources from the financial sector, increase interest rates, and reduce availability and access to loans. It may also be the case that the negative relationship between public debt and financial inclusion may result from the unproductive nature of expenditures more than the quantity of public debt itself.