Exploring Nexus between Public Debt and Interactions of Macroeconomic Variables

Abstract

his study investigates the short-run causal relationship between public debt (PD) and the interactions of money supply, interest rates, and exchange rate—captured through the composite Money Supply–Interest Rate–Exchange Rate (MIE) index—in five Southern African countries: Botswana, Namibia, South Africa, Zambia, and Zimbabwe, using annual panel data from 2010 to 2025. An understanding of the dynamic feedback effects of the interaction of macroeconomic variables on the dynamics of debt is important. The study employs Granger Causality tests and Vector Autoregressive (VAR) modeling techniques to capture both directional relationships and dynamic feedback effects. The results reveal a bidirectional causal relationship between the MIE index and public debt, suggesting that changes in money supply, interest rates, and exchange rates have a significant effect on debt accumulation, while changes in public debt also affect monetary and financial conditions in the short run. Robustness checks using lagged VAR specifications confirm the stability of the findings. The results of the study have vital policy implications for fiscal and monetary policy coordination for manageable debt sustainability, reduced macroeconomic volatility, and improved economic stability.