Public debt and economic growth in developing countries: Nonlinearity and threshold analysis

Using a dynamic panel threshold technique, this study provides new evidence on the threshold value of the ratio of public debt to the gross domestic product in seventy-one developing countries from 1984 to 2015. We show a threshold debt value of 51.65 percent, which is much lower than in the previous literature. Debt has a negative and statistically significant impact on economic growth at a high level of public debt but an insignificant effect at a low level of public debt. The findings also reveal that better institutions tend to minimize the negative impact of public debt on economic growth. For further robustness checks, this study uses different estimations, without outlier sample countries, and panel quantile regression, and the findings are unaltered. Our results can be useful for policy makers in designing appropriate fiscal policies to maximize economic growth.