Is there a debt-threshold effect on output growth?

Abstract

© 2017 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. 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.