Economics Journals| Applied Economics

The IUP Journal of Applied Economics

Estimating the Public Debt Threshold Level for Upper-Middle Income Asian Countries

Article Details

Pub. Date	: Oct, 2023
Product Name	: The IUP Journal of Applied Economics
Product Type	: Article
Product Code	: IJAE021023
Author Name	: Chandran Gunalan and Ramesh Mohan
Availability	: YES
Subject/Domain	: Economics
Download Format	: PDF Format
No. of Pages	: 14

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Abstract

This paper analyzes the nonlinear relationship between public debt and economic growth, and also estimates the threshold level for upper-middle income Asian countries for the period 1980 to 2021. The results confirm the nonlinear relationship with public debt threshold of 103.4% for the pooled sample. As for individual samples, the highest threshold recorded is 90.8% for Lebanon and the lowest is 15% for Kazakhstan. The results also reveal that nonlinear relationship can exist in both U-shape and -shape, indicating that beyond a specific threshold level, public debt can support higher GDP growth or drag it down. 'Negative' growth, as noted in the literature, does not necessarily indicate that growth becomes negative, but slower. In addition, debt threshold does not exist by default for all the countries, and therefore, we could not find any threshold for Armenia and Azerbaijan. Another crucial finding is that pooled sample tends to provide higher threshold, compared to individual samples. Hence, it causes a misleading understanding among policymakers.

Introduction

Analysis of public debt threshold gained popularity predominantly after the 2008-09 Global Financial Crisis. Lingering upward trend of public debt in many countries has raised concerns whether it is starting to hit a 'threshold', which may slowdown the economic growth. As such there are three critical questions which many researchers have attempted to explain, particularly: (i) Does a public debt "threshold" exist? (ii) Would the growth significantly affect beyond threshold level? (iii) And, what is the impact on growth if public debt remains at elevated level for an extended period of time? In the literature, there is no common agreement on these critical questions, which remain a subject of intense debate in academia. However, literature indicates that there are two sets of opinions, with one arguing that high levels of debt are associated with negative effects on growth, and the other disputing the notion. Research on public debt 'threshold' was pioneered by Reinhart and Rogoff (2010 and 2012) through their influential seminal papers highlighting that debt level beyond 90% of GDP will

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