Several studies have examined factors that accounts for growth in the gross domestic product of a nation (Misztal,2010). Most developed economy are investment driven and the investment are finance by debt either domestic or foreign debt,.Audu, study the effect of investment on GDP,concluding that the GDP is mostly influence by the volume of investment which are mostly finance by debt either locally or foreign. However, only little study has examined the effect of debt (Loan stock) on economic growth as measured by the GDP. There is the need to examine the direct effect of debt on economic growth in developing nation like Nigeria this is what this study attempt to do.
Also there is the need to examine the volatility of debt on the economic growth. Loan stock plays a major role in the budget and economic policy of developing nation. The extent of influence and volatility of debt remain largely undetermined over time. The basic objectives of this study are to examine the effect of debt volatility and debt volume on the GDP of Nigeria and to determine the effect of the shock on GDP.
One factor in determining the economic position of a country is through a comparison of public debt to the gross domestic product (GDP) of the country. This comparison is often listed as a percentage of how much of the GDP it would take to pay off the public debt. A low public debt and GDP percentage is usually an indication of economic health, while a high public debt and GDP percentage can indicate financial trouble for a country (Ellis, 2011).
Misztal summarized the relationships between public debt and gross domestic product stating that there are estimated elasticity coefficients of public debt to GDP and elasticity coefficients of GDP to public debt on the base of impulse response function. He further stated that there is made variance decomposition of the public debt and GDP in order to assess the impact of this factors on the variability of GDP and public debt respectively.
Reinhart and Rogoff summarize the relationship between debt and GDP based on compiled data on forty-four countries spanning about two hundred years which amounts to 3,700 annual observations and covers a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. The summary of the study is that Firstly, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP. Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The threshold for public debt is similar to advanced and emerging economies and applies for both the post World War II period and as far back as the data permit (often well into the 1800s).Secondly, emerging markets face lower thresholds for total external debt (public and private) – which is usually denominated in a foreign currency. When total external debt reaches 60% of GDP, annual growth declines by about 2%; for higher levels, growth rates are roughly cut in half. Thirdly, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the US, have experienced higher inflation when debt/GDP is high). The story is entirely different for emerging markets, where inflation rises sharply as debt increases. credit