Public debt and growth in Asian developing economies: evidence of non-linearity and geographical heterogeneity

Abstract

This paper examines the nonlinear effects of public debt on economic growth in Asian developing economies through the application of panel Generalized Method of Moments (GMM) regressions and panel vector autoregression (VAR) models. Our analysis reveals a statistically significant nonlinear (i.e., an inverted U-shape) relationship between public debt (as a percentage of GDP) and GDP per capita growth. The turning points are identified at 52 percent for all Asian developing economies and 50 percent for Asian coastal developing economies. Asymmetric mutual feedback effects are observed between economic growth and public debt, contingent on the level of public debt. These two-way effects are both statistically significant and more pronounced when public debt surpasses its threshold level. Additionally, our results unveil geographical (cross-country) heterogeneity in the mutual feedback effects. These findings carry significant policy implications, emphasizing the necessity of employing region-specific debt threshold levels and asymmetric response coefficients in the analysis of public debt policies.