Capital inflows and government debt: evidence of moderation and bidirectional causality

What is it about?

Plain Language Summary Can Foreign Investment Help Reduce Government Debt? This study explores the relationship between foreign investment (capital inflows) and government debt. We wanted to find out if foreign investment can help reduce government debt and if there is a cause-and-effect relationship between these two variables. What We Found Our research, which looked at data from 43 countries, shows that foreign investment can indeed help reduce government debt. Specifically, we found that foreign direct investment (FDI) is associated with lower debt levels. We also discovered that there is a two-way relationship between foreign investment and government debt, meaning that they can influence each other. Other Factors That Affect Government Debt We also identified other factors that can impact government debt levels. For example, economic growth, inflation, government spending, and population growth can all contribute to higher debt levels. On the other hand, investments in infrastructure, consumer spending, and trade openness can help reduce debt. Why This Study Matters Our study addresses two important gaps in the existing research on government debt and economic growth. First, it shows how foreign investment can help reduce government debt in a country. Second, it investigates the cause-and-effect relationship between government debt and foreign investment. Our findings provide new insights into the role of foreign investment in managing government debt and can inform policy decisions.

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