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Nonlinearity in the Debt-Growth Nexus in the EU: Evidence from Dynamic Panel Threshold Regression

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  • Vladimir Mihajlović

Abstract

This study investigates the impact of public debt on economic growth in a panel of 27 EU economies over the period 2000-2022. As the preliminary analysis suggests a nonlinear relationship between these variables, the debt threshold analysis based on the dynamic panel threshold regression is employed. The results for the whole panel indicate that public debt supports growth below a threshold of 68.7%, but it has a detrimental impact on growth if it is above the threshold. The validity of the findings is confirmed by including the effects of crises, which also indicates that economic growth in countries with debt below the threshold was more resilient to crisis events. The robustness of the estimates is checked using the method of moments quantile regression. However, the analysis of subsamples based on a country's EMU membership and the indebtedness level reveals the variety of debt thresholds, which calls for different fiscal governance across countries to reduce the negative effects of debt on economic growth. Overall, the results emphasize the importance of adequate fiscal space to respond to economic disturbances.

Suggested Citation

  • Vladimir Mihajlović, 2025. "Nonlinearity in the Debt-Growth Nexus in the EU: Evidence from Dynamic Panel Threshold Regression," Politická ekonomie, Prague University of Economics and Business, vol. 2025(3), pages 500-527.
    • Handle: RePEc:prg:jnlpol:v:2025:y:2025:i:3:id:1456:p:500-527
    DOI: 10.18267/j.polek.1456
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    More about this item

    Keywords

    Public debt; economic growth; debt threshold; European Union countries; fiscal governance;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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