Partners in Debt: An Endogenous Nonlinear Analysis of the Effects of Public and Private Debt on Growth

40 Pages Posted: 25 Jun 2018 Last revised: 27 Feb 2019

See all articles by Mehmet Caner

Mehmet Caner

Ohio State University (OSU)

Qingliang Fan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Thomas J. Grennes

North Carolina State University - Department of Economics

Date Written: February 24, 2019

Abstract

This paper analyzes how the interaction of public and private debt influences economic growth. Both debt variables are treated as endogenous and subject to regime switch, with the interaction term being the threshold variable. We test whether this interaction variable causes a nonlinear relationship. We find strong evidence for a threshold effect. The threshold variable is endogenous, unlike its treatment in the previous literature. Using data from 29 OECD countries from 1995-2014, the thresh old effect of the interaction between the public and private debt variables and economic growth is found to be negative and significant when it reaches the level of 137%. We also decompose private debt into household and corporate debt. We find that the public and private debt interaction is likely to operate through the channels of household debt and public debt. For a robustness check, we examine the sensitivity of the threshold effects to banking crises, output volatility, and institutional quality, different time periods, and alternative models.

Keywords: public and private debt, interactive effect, economic growth, endogenous threshold, dynamic panel data

JEL Classification: F34, F43, C5

Suggested Citation

Caner, Mehmet and Fan, Qingliang and Grennes, Thomas J., Partners in Debt: An Endogenous Nonlinear Analysis of the Effects of Public and Private Debt on Growth (February 24, 2019). Available at SSRN: https://ssrn.com/abstract=3186077 or http://dx.doi.org/10.2139/ssrn.3186077

Mehmet Caner (Contact Author)

Ohio State University (OSU) ( email )

452 ARPS HALL
1945 N HIGH STREET
Columbus, OH OH 43210
United States

Qingliang Fan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 312, Economics Building
Xiamen, Fujian 361005
China

HOME PAGE: http://michaelqfan.weebly.com

Thomas J. Grennes

North Carolina State University - Department of Economics ( email )

4110 Nelson
Raleigh, NC 27695-8110
United States
919-513-2881 (Phone)
919-515-6268 (Fax)

HOME PAGE: http://www.ag-econ.ncsu.edu/faculty/grennes/PubsGrennes.htm

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