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The threshold effect of institutional quality on sovereign debt and economic stability

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  • Chowdhury, Mohammad Ashraful Ferdous
  • Prince, Ehsanur Rauf
  • Shoyeb, Mohammad
  • Abdullah, Mohammad

Abstract

This study examines the threshold effect of institutional quality on the sovereign debt-macroeconomic stability nexus using panel data from 133 countries covering the period from 2002 to 2020. We measure macroeconomic stability using principal component analysis of budget deficit, annual inflation rate, official exchange rate, real interest rate, and unemployment rate. The dynamic GMM result shows that institutional quality has a positive effect on macroeconomic stability, while government debt has a negative effect. However, the interaction between institutional quality and government debt changes the direction of the effect of debt on macroeconomic stability. Moreover, in dynamic panel threshold regression, we document the evidence of the threshold effect of institutional quality on sovereign debt-macroeconomic stability nexus and suggest that before (after) the threshold level of institutional quality, there is a negative (positive) impact of debt on macroeconomic stability. Our result suggest that better institutions can use debt more efficiently and productively to enhance economic performance. The findings of this study have significant implications for policymakers in formulating policies to promote macroeconomic stability.

Suggested Citation

  • Chowdhury, Mohammad Ashraful Ferdous & Prince, Ehsanur Rauf & Shoyeb, Mohammad & Abdullah, Mohammad, 2024. "The threshold effect of institutional quality on sovereign debt and economic stability," Journal of Policy Modeling, Elsevier, vol. 46(1), pages 39-59.
    • Handle: RePEc:eee:jpolmo:v:46:y:2024:i:1:p:39-59
    DOI: 10.1016/j.jpolmod.2023.12.001
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    More about this item

    Keywords

    Institutional quality; Macroeconomic stability; Debt; Threshold;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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