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The Effect of Public Debt on Growth in Multiple Regimes

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  • Andros Kourtellos

    ()
    (University of Cyprus, Cyprus)

  • Thanasis Stengos

    ()
    (University of Guelph, Canada)

  • Chih Ming Tan

    ()
    (Clark University, USA)

Abstract

We employ a structural threshold regression methodology to investigate the heterogeneous effects of debt on growth using public debt as a threshold variable as well as several other plausible variables. Our methodology allows us to address three sources of model uncertainty that characterize cross-country growth data: parameter heterogeneity, theory uncertainty, and endogeneity. We find strong evidence for threshold effects based on democracy, which implies that higher public debt results in lower growth for countries in the Low-Democracy regime. Our results are consistent with the presence of parameter heterogeneity in the cross-country growth process due to fundamental determinants of economic growth proposed by the new growth theories.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 60_12.

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Date of creation: Aug 2012
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Handle: RePEc:rim:rimwps:60_12

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Keywords: parameter heterogeneity; public debt; debt threshold; threshold regression;

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Citations

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Cited by:
  1. Markus Eberhardt & Andrea F. Presbitero, 2013. "This Time They’re Different: Heterogeneity and Nonlinearity in the Relationship between Debt and Growth," Discussion Papers 2013/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Ouyang, Alice Y. & Rajan, Ramkishen S., 2014. "What determines external debt tipping points?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 215-225.
  3. Christian Dreger & Hans-Eggert Reimers, 2012. "Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt?," Discussion Papers of DIW Berlin 1249, DIW Berlin, German Institute for Economic Research.
  4. Markus Eberhardt, 2013. "Nonlinearities in the Relationship between Debt and Growth: Evidence from Co-Summability Testing," Discussion Papers 2013/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  5. Megersa, kelbesa, 2014. "The laffer curve and the debt-growth link in low-income Sub-Saharan African economies," MPRA Paper 54362, University Library of Munich, Germany.

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