Abstract
The aim of this study is to investigate the relationship between debt threshold and GDP per capita growth by using Panel Threshold Regression. The sample of the study is G7 (Advanced Countries) from the period of 1995 to 2015. The results suggested that the scale of debt threshold is ambiguous in this study because debt threshold has not significant effect on GDP per capita growth at the threshold level of 62.47%. The magnitude of debt effect is not same on below and above threshold level. If debt is below and above from 62.47%, its significant positive effect on GDP growth at 0.70% and 0.47% respectively. Also, explanatory variables are used in the study include inflation, trade to GDP, gross saving to GNI, government final consumption expenditure and total investment to GDP. There is a mix result of explanatory variables in the study as inflation and trade to GDP have positive effect on GDP per capita growth but does not produce significant result while gross saving and total investment to GDP have significant positive effect on GDP growth. At last, government final consumption expenditure has significant negative effect on GDP growth.
Highlights
Many empirical studies conducted in the past showing the public debt is growth-enhancing tools by many countries mostly for developed and developing countries
This study investigates the relationship between public debt and GDP per capita growth of G7 countries by employing the fixed effect panel threshold regression model
In order to find a threshold level, public debt to GDP is used as a threshold variable in model
Summary
Many empirical studies conducted in the past showing the public debt is growth-enhancing tools by many countries mostly for developed and developing countries. It is great interest to analyze the relationship between the accumulation of debt and GDP growth of G7 countries. In the era of 2007 to 2009, financial crisis emerged causes increase in debt and deficit ratios lead to fiscal and financial instability of many advance countries. It slow down the growth rate of many advances countries and arise the questions that government should take debt at a certain level because huge debt accumulation leads to negative effect on economic growth at the end. Despite the important of this study, there are few studies conducted on developed countries specially G7 (Advance countries) examines the relationship between public debt and GDP growth. Our estimation model includes some explanatory variables that expected to influences on GDP growth
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