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Role of Macroeconomic Channels in the Debt-Growth Nexus: Evidence of Non-linearity

In: India's Public Finance and Policy Challenges in the 2020s

Author

Listed:
  • Blessy Augustine

    (Madras School of Economics)

  • O. P. C. Muhammed Rafi

    (Indian Institute for Foreign Trade (IIFT))

Abstract

This research contributes to the existing body of literature on the relationship between public debt and economic growth by investigating potential non-linearities within various macroeconomic channels. Utilizing data spanning from 1980 to 2019, the study employs country-specific threshold regression models to explore the non-linear dynamics associated with the impact of public debt across investment, savings, interest rate, and total factor productivity channels in a sample of 18 emerging and developing economies. Our analysis reveals a nontrivial and diverse relationship between public debt and these macroeconomic channels, with considerable variation observed among countries in terms of identified thresholds. Moreover, the impact of public debt below and above these thresholds varies distinctly across countries for each channel. Interestingly, only one country within our sample exhibited operational functionality across all four channels. Furthermore, the significance of each channel varies significantly among countries, emphasizing the nuanced nature of the relationship between public debt and economic growth. The implications of these results suggest that the effectiveness of public debt in influencing economic growth hinges on how efficiently each macroeconomic channel operates within specific countries. Understanding these dynamics provides valuable insights for policymakers, guiding them in targeting optimal channels for utilizing public debt effectively.

Suggested Citation

  • Blessy Augustine & O. P. C. Muhammed Rafi, 2025. "Role of Macroeconomic Channels in the Debt-Growth Nexus: Evidence of Non-linearity," India Studies in Business and Economics, in: K. R. Shanmugam (ed.), India's Public Finance and Policy Challenges in the 2020s, pages 331-350, Springer.
    • Handle: RePEc:spr:isbchp:978-981-96-2860-5_18
    DOI: 10.1007/978-981-96-2860-5_18
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    More about this item

    Keywords

    Public debt; Macroeconomic channels; Non-linearity; Threshold;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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