The impact of government debt on public finance stability in Lithuania

Abstract

Purpose – though the global financial crisis is well behind us several EU countries continue to experience problems with public finance stability and need to cope with the consequences of high public debt. The purpose of the article is to find the relationship between government debt and of public finance stability in Lithuania. Research methodology – in order to achieve the aim of the article Financial Stability Index (FSI) for Lithuania has been created. It is based on theory and previous research. To find the determinants of FSI the multiple regression analysis model was specified and tested using Ordinary Least Squares (OLS). Findings – the results of multiple regression analysis indicate the government debt has a statistically significant impact on FSI, ceteris paribus. Other findings of the research show that profit or loss of the non-financial sector, foreign trade balance as well as a foreign direct investment are significant determinants of public finance stability. Research limitations – one of the limitations of this research is the small sample size that has an impact on the validity and generalizability of the results. Having a longer time-series data or panel data for more countries would improve the robustness and applicability of research results. Practical implications – the results of the research provide guidance to policymakers in the public finance area. Originality/Value − this paper contributes to the scarce literature on government debt and other determinants of financial stability in Lithuania.