This book develops a theoretical framework to explain the relationship
between public borrowing and economic growth and concentrates on four
economic variables: public debt level, borrowing cost, public investment
in infrastructure and economic growth. A simultaneous model is built and
analyzed using different estimation methods so as to capture the
relationship between the main dependent variables of interest, while
controlling for the dynamics between other endogenous variables. The
results show that public borrowing impacts state and local economic
growth in a quadratic manner. When the borrowing level is within certain
limit, it will improve economic growth primarily due to its contribution
to the improvement of infrastructure; when the borrowing exceeds that
limit, borrowing more money from the financial market will instead hurt
regional economic growth due to its negative effects such as
over-investing in infrastructure, undue debt service burden, among
others. Based on this quadratic pattern, an optimal level of borrowing
can then be calculated for making informative debt policies.