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The Effect of Public Debt on Growth in Multiple Regimes

  • Andros Kourtellos

    ()

    (University of Cyprus, Cyprus)

  • Thanasis Stengos

    ()

    (University of Guelph, Canada)

  • Chih Ming Tan

    ()

    (Clark University, USA)

We employ a structural threshold regression methodology to investigate the heterogeneous effects of debt on growth using public debt as a threshold variable as well as several other plausible variables. Our methodology allows us to address three sources of model uncertainty that characterize cross-country growth data: parameter heterogeneity, theory uncertainty, and endogeneity. We find strong evidence for threshold effects based on democracy, which implies that higher public debt results in lower growth for countries in the Low-Democracy regime. Our results are consistent with the presence of parameter heterogeneity in the cross-country growth process due to fundamental determinants of economic growth proposed by the new growth theories.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 60_12.

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Date of creation: Aug 2012
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Handle: RePEc:rim:rimwps:60_12
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