Does External Debt Stocks Have an Asymmetric Effect on Inflation Dynamics in Cameroon? An Application of Nonlinear ARDLL

Abstract

External debt is indispensable, especially in developing countries which usually face budget deficits to cover up their saving-investment gap. However, the effect of external debt on inflation depends on whether it is increasing or decreasing. Hence, this study aims to examine the effect of external debt stocks on inflation using World Bank data from 1980 to 2020 in Cameroon. The study makes use of non-linear ARDL to examine the positive and negative changes in external debt stocks and their effects on inflation. The results indicate a long-run increasing and decreasing asymmetry effect of external debts on inflation. Only the coefficient of positive external debt stock on inflation is positive and significant in the long run while in the short run, positive and negative external debt stocks respectively have a negative and positive significant impact on inflation. The study recommends that the government should be mindful of increasing external debt as it will become inflationary in the long run.