Purpose - Guided by economic models suggesting that growth can be stepped-up by increasing resources for investment, developing country governments have often resorted to borrowing to supplement revenue hence the accumulation of public debt. The purpose of this paper is twofold. First, it is to develop a dynamic model that identifies the fundamental structure of the public debt accumulation process. Second, it is to identify the mechanisms that generate public debt and their relative contribution to public debt accumulation. Design/methodology/approach – In this paper we developed a dynamic model that consists of the public debt sector linked with the production and household sector of the economy using the System Dynamics method. We use Vensim simulation software to develop the model.
Findings –We identified three mechanisms that generate public debt. They are the debt creation mechanism i.e. primary deficit, which is the palpable origin of public debt, the debt reproduction mechanism i.e. total interest payments, accrual of interest and foreign debt adjustment and the debt reduction mechanism i.e. debt relief, which are the attributes of public debt that contribute to debt accumulation[...]