External Debt and Economic Growth in Iran and Malaysia: A Smooth Transition Regression Model

Abstract

Since the debt crisis in 1980s, the effect of external debt on economic growth has been a controversial issue for economists. This paper aims to investigate the effects of external debt on economic growth in Iran and Malaysia. Findings of a Smooth Transition Regression (STR) model support a nonlinear relationship between the external debt size (the ratio of external debt stocks to GDP) and economic growth in Iran and Malaysia over the period 1973–2017. Moreover, results of the STR models estimation show that external debt affects Iranian economic growth in a two-regime structure with a threshold in 2.96%, so that, the effect is negative in both regimes, but in the second regime as debt increases, the negative effect becomes larger. Also, findings indicate that external debt size has a negative effect on Malaysian economic growth in a three-regime structure with two thresholds in 24.41% and 55.76%. Finally, the mentioned negative effect is considerably less severe in Malaysia than Iran.