Prague Economic Papers 2023, 32(2):107-128 | DOI: 10.18267/j.pep.825

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

Taner Turan ORCID...a, Pelin Varol Iyidogan ORCID...b
a Gebze Technical University, Department of Economics, Kocaeli, Turkey
b Hacettepe University, Department of Public Finance, Ankara, Turkey

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 invest-ment (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.

Keywords: Public debt, growth, investment, domestic credit, dynamic panel threshold
JEL classification: E62, H60, O40

Received: December 18, 2021; Revised: January 23, 2023; Accepted: February 10, 2023; Published: April 26, 2023  Show citation

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Turan, T., & Iyidogan, P.V. (2023). Non-linear Impacts of Public Debt on Growth, Investment and Credit: A Dynamic Panel Threshold Approach. Prague Economic Papers, 32(2), 107-128. doi: 10.18267/j.pep.825
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