The Effect of Public Debt on Growth in Multiple Regimes

Abstract:     
We employ a structural threshold regression methodology to investigate the heterogeneous effects of debt on growth using public debt as a threshold variable as well as several other plausible variables. Our methodology allows us to address three sources of model uncertainty that characterize cross-country growth data: parameter heterogeneity, theory uncertainty, and endogeneity. We find strong evidence for threshold effects based on democracy, which implies that higher public debt results in lower growth for countries in the Low-Democracy regime. Our results are consistent with the presence of parameter heterogeneity in the cross-country growth process due to fundamental determinants of economic growth proposed by the new growth theories.

Number of Pages in PDF File: 27

Keywords: parameter heterogeneity, public debt, debt threshold, threshold regression

JEL Classification: C59, O40, Z12

working papers series