Review of literature

4 
Yamin, I., Al_Kasasbeh, O., Alzghoul, A., Alsheikh, G. (2023) 
The Influence of Public Debt on Economic Growth: a Review of Literature
 
literature analysis varies significantly from past research in that it gives a full examination of 
the relationship between government debt and economic growth and terminates with some 
suggestions for future study. 
 
The Theoretical Arguments on the Impact of Public Debt on Economic Growth
The previous studies on the relationship between public debt and economic growth have 
shown mixed results. In some studies, negative relationships are found. However, other studies 
have found a positive relationship. Consequently, the path of the relationship between public 
debt and economic growth can be summarized into three groups. Namely, no impact, negative 
impact, and positive impact. 
 
Neutrality of Public Debt on Economic Growth
According to the Ricardian Equivalence Hypothesis (REH), increases in government 
expenditure, and consequently public indebtedness, lead to equivalent changes in private 
savings, and so have no effect on the actual economy. According to Ricardo's line of reasoning, 
the real economy is independent of the government's method of raising revenue, whether 
through taxation or debt issue, under specific circumstances. In his 1820 and 1877 works titled 
"Funding System" and "On the Principles of Political Economy and Taxation," respectively, 
Ricardo discussed the influence of governmental debt on resource allocation and economic 
growth. In the 20th century, Barro and Buchanan were the first to promote Ricardo's ideas in 
the literature with their articles "Are Government Bonds Net Wealth?" and "Is the public debt 
equivalent to taxation?" Barro and Buchanan's theoretical and empirical works led to what is 
now known as the REH, also known as the Barro-Ricardo Equivalence Hypothesis in certain 
literature. The REH stipulates that government debt solely explains the movement of financial 
resources among economic agents (Barro, 1989). Buchanan (1976), for example, contends that 
public sector debt has a direct influence only on private consumption and savings decisions, 
without contributing to the likelihood of net economic growth. This implies that changes in 
domestic and foreign public debt stocks are invariant with changes in important real 
macroeconomic variables, such as output and gross investment, and are, therefore, on the 
growth path of the economy (Barro, 1989). Similarly, in the neoclassical perspective, 
fluctuations in public debt resulting from expansionary fiscal policies are independent of the 
overall performance of the economy, supporting the claim that fiscal policy ineffective (Pereira 

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Intern. Journal of Profess. Bus. Review. | Miami, v. 8 | n. 4 | p. 01-11 | e01772 | 2023.