Debt-threshold effects on growth in post-communist EU economies: does institutional quality matter?

This study explores the impact of public debt on economic growth in 11 post-communist EU economies from 2000 to 2022. The dynamic panel threshold regression estimates indicate a nonlinear, inverse U-shaped relationship between debt and growth. When the debt-to-GDP ratio is below the threshold of 64.4%, debt promotes growth but hampers growth when it exceeds this level. Further analysis indicates that the quality of institutions plays a crucial role in this relationship: an increase in debt fosters growth when institutional quality exceeds the threshold of 0.482 but has no significant effect in the contrary case. The examination of the control group, comprising advanced EU economies, reveals a similar debt-growth relationship, though with a higher debt threshold of 69.8%, attributed to better institutions. Given the ongoing debates on sustainable debt levels in Europe, these findings could provide valuable policy insights for balancing debt with growth in post-communist economies.