The Heterogenous Threshold Effects of Public Debt on Economic Growth: Empirical Evidence from Developing Countries

This study investigates the threshold effects of public debt on economic growth in developing countries using a dynamic panel threshold model over the years 1990-2020. To examine the heterogenous threshold effects of public debt, we classify the sample, on the World Bank's income-based classification, as lower-middle-income economies and upper-middle-income economies. We find that public debt negatively affects the economic growth of developing countries above the threshold level of 50.988%. Furthermore, public debt negatively affects economic growth beyond threshold levels of 50.243% and 62.646%, respectively, in the case of lower-middle-income economies and upper-middle-income economies; indicating heterogeneities in threshold effects across the two subsamples. Also, we find that inflation negatively affects the public debt-growth relationship above the threshold levels of 14.03% (whole sample), 15.101% (lower middle-income economies), and 9.628% (upper-middle-income economies), respectively. Our baseline results are unaltered and consistent throughout the robustness check exercises. Our results have important policy implications for developing countries in terms of designing prudent public debt management policies and inflation targeting policies, respectively.