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Is There a Debt-Threshold Effect on Output Growth?

Alexander Chudík; Kamiar Mohaddes¹; M. Hashem Pesaran^2,3; Mehdi Raissi⁴

¹ University of Cambridge · ² University of Southern California · ³ Trinity College · ⁴ International Monetary Fund

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.

DOI

10.1162/rest_a_00593

Volume

99 (1)

Pages

135-150

Language

en

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BibTeX

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