Purpose

- This study examines the impact of external debt on economic growth in Bangladesh within a broader macroeconomic scenario. In the process of doing so, it assesses the empirical cointegration, long-run, and short-run dynamics of the concerned variables for the period of 1980-2017.

Design/methodology/approach

- Autoregressive Distributed Lag (ARDL) "Bound Test" approach to cointegration is employed for the estimation in this study.

Findings

The study results reveal the negative impact of external debt on GDP growth, but the larger positive impact of macroeconomic policy index indicates that this adverse effect of debt can be mitigated or even nullified by sound macroeconomic policy and appropriate human resources policy. The dynamic effects of different shocks (external debt and macro policy variable) on economic growth by the VAR impulse response function also confirm our ARDL findings.

Originality/value

- Firstly, Debt-GDP linkage explores the impact of external debt impact on economic growth using a set of macro variables, and then this linkage is also analysed along with a newly formed macroeconomic policy variable using principal component analysis (PCA).