The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-Income Countries and Emerging Markets

This paper develops a new public domestic debt database covering 93 low-income countries and emerging markets over 1975–2004 to estimate the growth impact of domestic debt. Moderate levels of noninflationary domestic debt, as a share of GDP and bank deposits, are found to exert a positive overall impact on economic growth. Granger-causality regressions suggest support for a variety of channels: improved monetary policy; broader financial market development; strengthened domestic institutions/accountability; and enhanced private savings and financial intermediation. There is some evidence that, above a ratio of 35 percent of bank deposits, domestic debt begins to undermine growth, lending credence to traditional crowding out and bank efficiency concerns. Importantly, the growth contribution of domestic debt is higher if it is marketable, bears positive real interest rates, and is held outside the banking system.