Non-linear Impacts of Public Debt on Growth, Investment and Credit: A Dynamic Panel Threshold Approach

Abstract

This paper examines the effects of public debt on the growth rate, investment and domestic credit provided to private sector using the dynamic panel threshold regression method for a large number of developing countries, namely 53 (48) economies for growth and investment (credit) regressions. Our results suggest that public debt does not have a significant impact on the economic growth rate. Despite a strong negative effect of public debt on the total investment, our results do not support the existence of a (strong) threshold effect of public debt on total (private) investment. On the other hand, we present evidence for a threshold effect of public debt on public investment and credit. More precisely, public debt leads to a reduction in public investment and credit when the public debt exceeds the estimated threshold levels. Since public debt matters for investment and credit, it is important to ensure fiscal discipline and prudence in the long term.