Does Public Debt Encourage Economic Growth? An Application of Quantile Regressions to Panel Data for Developing Countries

Previous studies on the relationship between government debt and economic growth have produced very diverse findings. This study examines the relationship between public debt and economic growth in developing countries using a quantile regression approach with fixed effects and bootstrapping on the 10% to 90% quantile distribution. The quantile grouping is based on specific percentiles of economic growth in developing countries. This study uses panel data from 127 developing countries for the period 2012 to 2019. Data were obtained from the World Development Indicators, the World Bank, and Transparency International. The results of this study indicate that public debt is not friendly to economic growth. Public debt actually hinders economic growth in developing countries, especially in the 30% to 90% quantile. Other factors that influence economic growth in developing countries are trade, inflation rates, government spending, corruption, and net foreign direct investment. Trade and net direct investment significantly increase economic growth in developing countries. Meanwhile, public debt, the inflation rate, government spending, and corruption actually inhibit economic growth in developing countries. On the other hand, education spending, private debt, tax revenues, and labor force participation do not contribute significantly to economic growth in developing countries. These findings confirm that public debt governance and governance are very important in driving economic growth in developing countries. This paper provides empirical and policy contributions to the assessment of institutional effectiveness in relation to the impact of public debt management on economic growth in developing countries.