Public debt and economic growth: threshold effect and its influence factors

ABSTRACT

We investigate the effect of public debt on economic growth and its influencing factors by using a panel data of 102 countries over the period 1980–2016. Results show that there is a non-linear relationship between public debt and economic growth, this relationship exists in developing, emerging market and developed countries. However, the thresholds of public debt for different types of countries do not have uniqueness and determinacy, which vary with current account balance, gross savings, crisis and degrees of opening, these variable effects on the three groups of countries have significant difference. The findings suggest that policymakers should control the scale of public debt and its influence factors to support longer-term economic growth.

KEYWORDS:

• Public debt
• economic growth
• threshold effect
• influence factors

JEL CLASSIFICATION:

• O11
• C23
• F34
• N10

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The sample consists of 50 developing countries (Algeria, Bahamas, Bahrain, Bangladesh, Barbados, Belize, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central Africa, Chad, Comoros, Congo Democratic Republic, Congo Republic, Ivory Coast, Dominica, Fiji, Gabon, Gambia, Grenada, Guatemala, Guinea-Bissau, Honduras, Iran, Jamaica, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Ecuador, Nepal, Niger, Oman, Pakistan, Panama, Rwanda, Senegal, Seychelles, Sierra Leone, Saint Vincent and the Grenadines, Swaziland, Togo, Trinidad and Tobago, Tunisia, Uganda, Zimbabwe), 25 emerging market countries (Argentina, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Egypt, Equatorial Guinea, Salvador, Ghana, India, Indonesia, Kenya, Malaysia, Mexico, Nigeria, Peru, the Philippines, South Africa, Sri Lanka, Thailand, Turkey, Uruguay, Venezuela), 27 developed countries (Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, South Korea, Malta, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Britain and the United States).

² General government departments are non-market and non-profit organizations controlled by all government units and provided with major funds by central, state and local government units. General government departments do not lude state-owned or quasi-companies.

³ Debt data is drawn from Historical Public Debt Database, csh data is from Penn World Table Database Vision 9.0, and the other data are from World Development Indicators (WDI) Database of the World Bank.

⁴ Using 5 years as a cycle can eliminate short-term fluctuations in economic growth, reflecting the fact that it may take some time for public debt to produce economic effects.

⁵ The threshold effect in this paper is constructed by the secondary term of the public debt, the estimated result can be regarded as a quadratic equation of the public debt for the economic growth rate, from simple mathematical knowledge: threshold value is x = -b/2a in $\mathrm{y}={\mathrm{a}}^2\mathrm{x}+\mathrm{b}\mathrm{x}+\mathrm{c}$.

⁶ On the basis of Reinhart and Rogoff (2010), crises can be divided into monetary crisis, inflation crisis, stock market crisis, sovereign debt crisis and banking crisis according to their origin and nature. If any one of the crises happens, the value will be equal to 1, otherwise the value will be equal to 0. Data are drawn from Reinhart and Rogoff (2010).

Additional information

Funding

This work has been supported by Humanities and Social Science Research Fund of Ministry of Education of the People’s Republic of China, [Grants No. 16YJA790033].