Issue

Vol 39 No 2 (2024): May

Date Log

Submitted
Oct 10, 2022
Accepted
Oct 25, 2023
Published
May 8, 2024
Creative Commons License

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Copyright

Upon acceptance of an article, authors transfer copyright to the JIEB as part of a journal publishing agreement, but authors still have the right to share their article for personal use, internal institutional use, and for any use permitted under the CC BY-SA license

Open Access

Articles are freely available to the public without any subscription with permitted reuse. For open access articles, permitted third party (re)use is defined by the following Creative Commons user licenses: Creative Commons Attribution (CC BY-SA).

Nonlinear Analysis of Growth’s Effect on Debt: Finding the Threshold

https://doi.org/10.22146/jieb.v39i2.5819
Sugeng Triwibowo
sugengtriwibowo@mail.ugm.ac.id
Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada, Yogyakarta, 55281, Indonesia
Defy Oktaviani
Directorate General of Foreign Trade, Ministry of Trade, Jakarta, 10110, Indonesia
Nurfika
Statistics Serang Regency, BPS-Statistics Indonesia, Serang, 42182, Indonesia

Corresponding Author(s) : Sugeng Triwibowo

sugengtriwibowo@mail.ugm.ac.id

Journal of Indonesian Economy and Business, Vol 39 No 2 (2024): May

Abstract

Introduction/Main Objectives: This paper explores the nonlinear effect of economic growth on the accumulation of public debt for groups of countries, based on their income levels, by finding its threshold estimator. Background Problems: The existing literature has discussed the debt's effect on growth intensively. Thus, empirical analysis to observe the inverse relationship between both variables is needed. Novelty: This paper confirms the negative and nonlinear impact of economic growth on public debt, and finds the threshold levels of economic growth on debt in high-income countries (HIC) and low-and middle-income countries (LMIC). Research Methods: We employed OLS panel regression with data covering 62 countries from 1970 to 2015. The fixed-effect panel threshold model is used to estimate the threshold level of economic growth that affects debt accumulation. Finding/Results: We found that economic growth reduces the public debt in the long run. In HIC, we find two threshold levels of economic growth, at 2.92% and at 8.41%. Moreover, in LMIC, a single threshold is found at 11.61%. Conclusion: It is proven that maintaining robust economic growth could reduce debt accumulation in the long run, the magnitude of the impacts varies between HIC and LMIC.

Keywords

economic growth public debt panel threshold model
Triwibowo, S., Oktaviani, D., & Nurfika. (2024). Nonlinear Analysis of Growth’s Effect on Debt: Finding the Threshold. Journal of Indonesian Economy and Business, 39(2), 195-212. https://doi.org/10.22146/jieb.v39i2.5819
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX
References
  1. Afonso, A., & Jalles, J. T. (2013). Growth and productivity : The role of government debt. International Review of Economics and Finance, 25, 384–407. https://doi.org/10.1016/j.iref.2012.07.004
  2. Afzal, M. (2012). Ricardian equivalence hypothesis: Evidence from Pakistan. E3 Journal of Business Management and Economics, 3(6), 258–265. http://www.e3journals.org
  3. Aimola, A. U., & Odhiambo, N. M. (2021). Public debt and inflation nexus in Nigeria: An ARDL bounds test approach. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1921905
  4. Alam, N., & Taib, F. M. (2013). an Investigation of the Relationship of External Public Debt With Budget Deficit, Current Account Deficit, and Exchange Rate Depreciation in Debt Trap and Non-Debt Trap Countries. European Scientific Journal August, 9(22), 1857–7881. https://doi.org/10.19044/esj.2013.v9n22p%25p
  5. Azolibe, C. B. (2021). Determinants of External Indebtedness in Heavily Indebted Poor Countries: What Macroeconomic and Socio-Economic Factors Matter? American Economist, 66(2), 249–264. https://doi.org/10.1177/0569434520938326
  6. Baldacci, E., Gupta, S., & Mulas-Granados, C. (2009). How Effective is Fiscal Policy Response in Systemic Banking Crises? IMF Working Papers, 09(160), 1. https://doi.org/10.5089/9781451873078.001
  7. Barro, R. J. (1990). Government Spending in a Simple Model of Endogeneous Growth. Journal of Political Economy, 98(5, Part 2), S103–S125. https://doi.org/10.1086/261726
  8. Baum, A., Checherita-westphal, C., & Rother, P. (2013). Debt and growth : New evidence for the euro area. Journal of International Money and Finance, 32, 809–821. https://doi.org/10.1016/j.jimonfin.2012.07.004
  9. Bell, A., Johnston, R., & Jones, K. (2015). Stylised fact or situated messiness? The diverse effects of increasing debt on national economic growth. Journal of Economic Geography, 15(2), 449–472. https://doi.org/10.1093/jeg/lbu005
  10. Bittencourt, M. (2015). Determinants of government and external debt: Evidence from the young democracies of South America. Emerging Markets Finance and Trade, 51(3), 463–472. https://doi.org/10.1080/1540496X.2015.1025667
  11. Brida, J. G., Gómez, D. M., & Seijas, M. N. (2017). Debt and growth: A non-parametric approach. Physica A: Statistical Mechanics and Its Applications, 486, 883–894. https://doi.org/10.1016/j.physa.2017.05.060
  12. Caner, M., Fan, Q., & Grennes, T. (2021). Partners in debt: An endogenous non-linear analysis of the effects of public and private debt on growth. International Review of Economics and Finance, 76, 694–711. https://doi.org/10.1016/j.iref.2021.07.010
  13. Cecchetti, S. G., Mohanty, M. S., & Zampolli, F. (2010). The future of public debt: prospects and implications. BIS Working Paper, 300.
  14. Checherita-westphal, C., & Rother, P. (2012). The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area. European Economic Review, 56(7), 1392–1405. https://doi.org/10.1016/j.euroecorev.2012.06.007
  15. de Soyres, C., Wang, M., & Kawai, R. (2022). Public Debt and Real GDP: Revisiting the Impact. IMF Working Papers, 2022(076). https://doi.org/10.5089/9798400207082.001
  16. De Vita, G., Trachanas, E., & Luo, Y. (2018). Revisiting the bidirectional causality between debt and growth: Evidence from linear and nonlinear tests. Journal of International Money and Finance, 83, 55–74. https://doi.org/10.1016/j.jimonfin.2018.02.004
  17. Di Sanzo, S., & Bella, M. (2015). Public debt and growth in the euro area: Evidence from parametric and nonparametric Granger causality. B.E. Journal of Macroeconomics, 15(2), 631–648. https://doi.org/10.1515/bejm-2014-0028
  18. Dombi, Á., & Dedák, I. (2019). Public debt and economic growth: what do neoclassical growth models teach us? Applied Economics, 51(29), 3104–3121. https://doi.org/10.1080/00036846.2018.1508869
  19. Donayre, L., & Taivan, A. (2017). Causality between Public Debt and Real Growth in the OECD : A Country-by-country Analysis. Economic Papers, 1–15. https://doi.org/10.1111/1759-3441.12175
  20. Doraisami, A. (2011). Countercyclical fiscal policy issues challenges in Malaysia etc. In ADBI Working Paper Series No. 288 (Issue 288). https://www.adb.org/sites/default/files/publication/156143/adbi-wp288.pdf
  21. Dritsaki, C. (2013). Causal Nexus Between Economic Growth, Exports and Govern-ment Debt: The case of Greece. Procedia Economics and Finance, 5(13), 251–259. https://doi.org/10.1016/S2212-5671(13)00031-2
  22. Eberhardt, M., & Presbitero, A. F. (2015). Public debt and growth: Heterogeneity and non-linearity. Journal of International Econo¬mics, 97(1), 45–58. https://doi.org/10.1016/j.jinteco.2015.04.005
  23. Égert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality? Journal of Macroeconomics, 43, 226–238. https://doi.org/10.1016/j.jmacro.2014.11.006
  24. Elmendorf, D. W., & Mankiw, N. G. (1998). Government debt (pp. 182–183). National Bureau of Economic Research. https://doi.org/10.1787/factbook-2015-77-en
  25. Ewaida, H. Y. M. (2017). The impact of sovereign debt on growth: An empirical study on GIIPS versus JUUSD countries. European Research Studies Journal, 20(2), 607–633.
  26. Ferreira, C. (2016). Debt and Economic Growth in the European Union: A Panel Granger Causality Approach. International Advances in Economic Research, 22(2), 131–149. https://doi.org/10.1007/s11294-016-9575-y
  27. Filippakis, N., & Stamatopoulos, T. V. (2021). Public Debt and Economic Growth: A Review of Contemporary Literature. South-Eastern Europe Journal of Economics, 19(1), 33–50. https://orcid.org/0000-0002-9710-0870.
  28. Fisera, B., Tiruneh, M. W., & Hojdan, D. (2021). Currency depreciations in emerging economies: A blessing or a curse for external debt management? International Economics, 168, 132–165. https://doi.org/10.1016/j.inteco.2021.09.003
  29. Ghosh, A. R., Kim, J. I., Mendoza, E. G., Ostry, J. D., & Qureshi, M. S. (2013). Fiscal Fatigue, Fiscal Space and Debt Sustaina¬bility in Advanced Economies. Economic Journal, 123(566), 4–30. https://doi.org/10.1111/ecoj.12010
  30. Gómez-puig, M., & Sosvilla-rivero, S. (2015). The causal relationship between debt and growth in EMU countries. Journal of Policy Modeling, 37(6), 974–989. https://doi.org/10.1016/j.jpolmod.2015.09.004
  31. Greenidge, K., Drakes, L., & Craigwell, R. (2010). The external public debt in the Caribbean Community. Journal of Policy Modeling, 32(3), 418–431. https://doi.org/10.1016/j.jpolmod.2010.02.004
  32. Hagemann, R. P. (2012). What are the Best Policy Instruments for Fiscal Consolidation? OECD Economic Department Policy Notes, No.12, April, 12, 1–12.
  33. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93, 345–368.
  34. Hilton, S. K. (2021). Public debt and economic growth: contemporary evidence from a developing economy. Asian Journal of Economics and Banking, 5(2), 173–193. https://doi.org/10.1108/ajeb-11-2020-0096
  35. Imrohoroglu, S., & Sudo, N. (2011). Will a Growth Miracle Reduce Debt in Japan? (pp. 44–56).
  36. Irons, J., & Bivens, J. (2010). Government Debt and Economic Growth Overreaching Claims of Debt “Threshold” Suffer from Theoretical and Empirical Flaws. Economic Policy Institute, 271, 1–9.
  37. Jacobs, J., Ogawa, K., Sterken, E., & Tokutsu, I. (2020). Public Debt, Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries. Applied Economics, 52(12), 1377–1394. https://doi.org/10.1080/00036846.2019.1673301
  38. Karadam, D. Y. (2018). An investigation of nonlinear effects of debt on growth. Journal of Economic Asymmetries, 18(March), e00097. https://doi.org/10.1016/j.jeca.2018.e00097
  39. Kose, M. A., Nagle, P. S. O., Ohnsorge, F., & Sugawara, N. (2022). What Has Been the Impact of COVID-19 on Debt? Turning a Wave into a Tsunami. SSRN Electronic Journal, November. https://doi.org/10.2139/ssrn.3980291
  40. Kose, M. A., & Ohnsorge, F. (2020). Emerging and Developing Economies: Ten Years After the Global Recession. Policy Research Working Paper, 9148 (February). https://doi.org/10.2139/ssrn.3541418
  41. Kumar, M. S., & Woo, J. (2010). Public Debt and Growth. IMF Working Paper 174.
  42. Mencinger, J., Aristovnik, A., & Verbič, M. (2014). The impact of growing public debt on economic growth in the European union. Amfiteatru Economic, 16(35), 403–414.
  43. Murwirapachena, G., & Kapingura, F. M. (2015). Determinants of external debt in South Africa: A VAR-based approach. International Journal of Economic Policy in Emerging Economies, 8(2), 138–152. https://doi.org/10.1504/IJEPEE.2015.069593
  44. Özmen, İ., & Mutascu, M. (2023). Public Debt and Growth: New Insights. In Journal of the Knowledge Economy (Issue June). https://doi.org/10.1007/s13132-023-01441-3
  45. Padoan, P., Sila, U., & Noord, P. Van Den. (2012). Avoiding debt traps: Fiscal consoli¬dation, financial backstops and structural reforms. OECD Journal: Economic Studies, 2012(1), 151–177. http://www.oecd.org/eco/public-finance/AvoidingdebttrapsFiscalconsolidationfinancialbackstopsandfinancialreforms.pdf
  46. Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41, 21–41. https://doi.org/10.1016/j.jmacro.2014.03.009
  47. Rahman, N. H. A., Ismail, S., & Ridzuan, A. R. (2019). How does public debt affect economic growth? A systematic review. Cogent Business and Management, 6(1), 1–16. https://doi.org/10.1080/23311975.2019.1701339
  48. Reinhart, B. C. M., & Rogoff, K. S. (2010). Growth in a Time of Debt. 100(May), 573–578.
  49. Reinhart, C. M., Reinhart, V. R., & Rogoff, K. S. (2012). Public debt overhangs: Advanced-economy episodes since 1800. Journal of Economic Perspectives, 26(3), 69–86. https://doi.org/10.1257/jep.26.3.69
  50. Saungweme, T., & Odhiambo, N. M. (2019). Government debt, government debt service and economic growth nexus in Zambia: a multivariate analysis. Cogent Economics and Finance, 7(1), 1–17. https://doi.org/10.1080/23322039.2019.1622998
  51. Sinha, P., Arora, V., & Bansal, V. (2011). Determinants of Public Debt for middle income and high income group countries using Panel Data regression. Munich Personal RePEc Archive, 32079, 27.
  52. Swamy, V. (2020). Debt and growth: Decomposing the cause and effect relationship. International Journal of Finance and Economics, 25(2), 141–156. https://doi.org/10.1002/ijfe.1729
  53. Wang, C.-H., & Lin, E. S. (2010). Panel Threshold Regression Models with Endogenous Threshold Variables.
  54. Wang, Q. (2015). Fixed-effect panel threshold model using Stata. Stata Journal, 15(1), 121–134. https://doi.org/10.1177/1536867x1501500108
Read More
Author biographies is not available.
Download this PDF file
PDF
Statistic
Read Counter : 447 Download : 548