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Unveiling the relationship between the optimal debt threshold level and debt-economic growth in selected indebted countries: panel threshold analysis

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  • Usman Saleem Yousaf

    (Government College University Lahore)

  • Babar Aziz

    (Government College University Lahore)

Abstract

This study examines the impact of public debt on economic growth and the debt threshold in selected indebted economies from 1990 to 2021. We employ several econometric methods: the cross-sectional autoregressive distributed lag model and the dynamic panel threshold model, which allow for common correlated effects, to analyse the short- and long-term impacts of debt on growth. Additionally, we explore the effects of changes in public debt using the panel CSARDL method. Our findings reveal that the square term of debt is negative and significant, indicating that an increase in public debt is negatively associated with long-term growth. The debt threshold is calculated to be 56% of GDP, beyond which it adversely affects growth. The negative and significant error correction term (ECT) suggests that the model converges to a long-run equilibrium path. Finally, this study recommends that policymakers in highly indebted countries focus more on resolving debt issues and effectively utilising public debts and borrowings in productive ways, as these factors significantly impact the economic growth of the countries under study.

Suggested Citation

  • Usman Saleem Yousaf & Babar Aziz, 2024. "Unveiling the relationship between the optimal debt threshold level and debt-economic growth in selected indebted countries: panel threshold analysis," Quality & Quantity: International Journal of Methodology, Springer, vol. 58(5), pages 5003-5025, October.
    • Handle: RePEc:spr:qualqt:v:58:y:2024:i:5:d:10.1007_s11135-024-01888-9
    DOI: 10.1007/s11135-024-01888-9
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