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Is There a Debt-Threshold Effect on Output Growth?

Author

Listed:
  • Alexander Chudik

    (Federal Reserve Bank of Dallas)

  • Kamiar Mohaddes

    (Faculty of Economics and Girton College, University of Cambridge UK)

  • M. Hashem Pesaran

    (USC Dornsife INET, Department of Economics, University of Southern California, USA and Trinity College, Cambridge, UK)

  • Mehdi Raissi

    (International Monetary Fund)

Abstract

This paper studies the relationship between public debt expansion and economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. We contribute theoretically by developing tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors. In the empirical application, using data on a sample of forty countries over the 1965–2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth. Regardless of the threshold, however, we find significant negative effects of public debt buildup on output growth.

Suggested Citation

  • Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2017. "Is There a Debt-Threshold Effect on Output Growth?," The Review of Economics and Statistics, MIT Press, vol. 99(1), pages 135-150, March.
    • Handle: RePEc:tpr:restat:v:99:y:2017:i:1:p:135-150
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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