Public Debt – Economic Growth: Evidence of Non-linear Relationship
Blessy Augustine, O.P.C. Muhammed Rafi
BASE University Working Paper Series 11/2021
The impact of public debt on economic growth has been widely examined in the literature. The discussions 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 came thereafter found a common threshold for a group of countries and a negative impact of debt on growth beyond this threshold. In this context, we examine the presence of a threshold in the debt-growth nexus and the difference in the impact of debt on growth below and above this threshold in case of 39 emerging and developing economies for the period 1980 – 2019. Unlike most of the existing panel studies, we explore the debt growth relationship using country specific threshold regression models. Our findings show that in countries those
confirmed a nonlinearity, the thresholds vary drastically, 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. Apart from having different sets of countries with a positive impact below the threshold and a negative impact above, we could also find evidence for debt supporting growth beyond the threshold in case of ten countries. Also, there are countries in which the detrimental impact debt kicking in even below the threshold value of debt. Our result shows that the impact of public debt on economic growth is different across countries both below and above the threshold.