Research Paper on Empirical Evidence on the Factors Influencing the Public Debt-Growth Relationship’s Turning Point

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Title: Empirical Evidence on the Factors Influencing the Public Debt-Growth Relationship’s Turning Point

Abstract: This study adds to the scant body of research on the variables influencing the public debt-growth relationship’s turning point. The COVID-19 pandemic put additional strain on public finances ten years after the global financial crisis, at a time when debt levels in many nations were still higher than they had been during the crisis. It reopened the topic of whether government spending financed by debt could aid in the recovery of the economy. Increased government borrowing, however, raises its costs and creates more uncertainty regarding future taxation policy, potentially impairing private consumption, investment, and economic growth. In this paper, we calculate the expenditure multiplier thresholds, which may already indicate a risk that public debt will slow economic growth. Utilizing consumption, investment, axes, and imports as threshold variables along with several other elements suggested by earlier contributions, we use a structural threshold regression methodology to investigate the various effects that debt may have on growth. The used methodology makes it possible to address parameter heterogeneity and endogeneity at the same time. The main findings imply that an increase in the public debt-to-GDP ratio is not always harmful to growth if shares of private consumption and investment in GDP are high while the tax-revenue-to-GDP ratio is low. A positive debt effect is more likely if the conditions for a high expenditure multiplier are met.

Keywords: economic growth; expenditure multiplier; heterogeneity; public debt

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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