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Vol 39 No 2 (2024): May

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Oct 10, 2022
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May 8, 2024
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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
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