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New insights on the debt-growth nexus: A combination of the interactive fixed effects and panel threshold approach

Author

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  • Yacouba Kassouri
  • Halil Altintas
  • Erdal Alancioglu
  • Kacou Yves Thierry Kacou

Abstract

This study revisits the nexus between debt and growth in the following distinct ways. First, the interactive fixed effects and dynamic panel threshold methods are employed to estimate the threshold effect of public debt on economic growth. Secondly, we account for cross-section dependence, time-varying unobserved heterogeneity, and feedback effects. Thirdly, we provide a more complete picture of the debt-growth nexus at different income levels by decomposing our sample into upper-middle-income and low-income subsamples. The empirical application based on a sample of 62 emerging and developing countries from 2000 to 2018 suggests that inverted U-shaped nexus exists between debt and growth in emerging and developing countries. However, the dynamic panel threshold results indicate that public debt harms growth when the indebtedness level exceeds the estimated threshold of 50.19% and 25.09% of GDP for the upper-middle-income and low-income subsamples, respectively. Furthermore, the negative effect of debt seems to be stronger in low than in upper-middle-income countries. By comparison, evidence of a positive effect of public debt on economic growth is weak and insignificant in low-income countries.

Suggested Citation

  • Yacouba Kassouri & Halil Altintas & Erdal Alancioglu & Kacou Yves Thierry Kacou, 2021. "New insights on the debt-growth nexus: A combination of the interactive fixed effects and panel threshold approach," International Economics, CEPII research center, issue 168, pages 40-55.
    • Handle: RePEc:cii:cepiie:2021-q4-168-4
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    Cited by:

    1. Mawejje, Joseph & Odhiambo, Nicholas M., 2022. "The determinants and cyclicality of fiscal policy: Empirical evidence from East Africa," International Economics, Elsevier, vol. 169(C), pages 55-70.
    2. Olumide Olusegun Olaoye & Mosab I. Tabash & Olatunde Julius Omokanmi & Rotimi Ayoade Ogunjumo & Matthew Oyeleke Ojelade & James A. Ishola, 2022. "Macroeconomic implications of escalating stock of public debt: Evidence from sub‐Saharan African economies," African Development Review, African Development Bank, vol. 34(4), pages 527-540, December.

    More about this item

    Keywords

    Debt; Economic growth; Time-varying heterogeneity; Dynamic panel data analysis; Emerging and developing countries;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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