Public debt-economic growth: Evidence of a non-linear relationship
By
Dr Muhammad Rafi OPC
Assistant Professor , BASE University
Date: 31st July, 2021
Time: 12.00 noon IST
Place: Webinar, Microsoft Teams
Abstract
The impact of public debt on economic growth has been widely examined in the literature. However, the discussion has shifted towards examining the possibility of a nonlinear relationship after the seminal work of Reinhart and Rogoff (2010) who proposed a threshold of 90 percent debt to GDP ratio beyond which debt is said to have a detrimental effect on economic growth. Many studies thereafter found a common threshold for a group of countries and a negative impact of debt on growth beyond the threshold. In this context, we examine the presence of a threshold in the debt-growth nexus and the existence of an inverted U-shape relationship as suggested by Reinhart and Rogoff (2010) and many other studies. We consider 39 emerging and developing economies for the period 1980 to 2019 and the debt growth relationship is being examined for each country using the threshold regression model. Our findings show that thresholds vary drastically across countries ranging between 24 and 116 percent. The results dismiss the possibility of a common threshold that fit for all countries and highlights the importance of finding country specific thresholds. Further, we could not find an inverted U-shape relationship between debt and growth in our sample. Rather, we could find the evidence of a positive impact of debt on growth in case of ten countries while debt affect growth negatively only in case of four countries beyond the threshold.