Politická ekonomie 2025, 73(3):500-527 | DOI: 10.18267/j.polek.1456

Nonlinearity in the Debt-Growth Nexus in the EU: Evidence from Dynamic Panel Threshold Regression

Vladimir Mihajlović ORCID...
University of Kragujevac, Faculty of Economics, Serbia

This study investigates the impact of public debt on economic growth in a panel of 27 EU economies over the period 2000-2022. As the preliminary analysis suggests a nonlinear relationship between these variables, the debt threshold analysis based on the dynamic panel threshold regression is employed. The results for the whole panel indicate that public debt supports growth below a threshold of 68.7%, but it has a detrimental impact on growth if it is above the threshold. The validity of the findings is confirmed by including the effects of crises, which also indicates that economic growth in countries with debt below the threshold was more resilient to crisis events. The robustness of the estimates is checked using the method of moments quantile regression. However, the analysis of subsamples based on a country's EMU membership and the indebtedness level reveals the variety of debt thresholds, which calls for different fiscal governance across countries to reduce the negative effects of debt on economic growth. Overall, the results emphasize the importance of adequate fiscal space to respond to economic disturbances.

Keywords: Public debt, economic growth, debt threshold, European Union countries, fiscal governance
JEL classification: C23, F43, H63, O47

Received: July 9, 2024; Revised: August 16, 2024; Accepted: August 16, 2024; Prepublished online: June 17, 2025; Published: June 19, 2025  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Mihajlović, V. (2025). Nonlinearity in the Debt-Growth Nexus in the EU: Evidence from Dynamic Panel Threshold Regression. Politická ekonomie, 73(3), 500-527. doi: 10.18267/j.polek.1456
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Al Shammre, A. S., Benhamed, A., Jaidi, Z. (2023). Do Environmental Taxes Affect Carbon Dioxide Emissions in OECD Countries? Evidence from the Dynamic Panel Threshold Model. Systems, 11(6), 307. https://doi.org/10.3390/systems11060307 Go to original source...
    2. Alimi, N., Dhiab, L. B. (2023). Governance and economic growth in developing countries: A panel threshold regression analysis. Economic Horizons, 25(2), 117-133. https://doi.org/10.5937/ekonhor2302117A Go to original source...
    3. Andrews, M. (2013). The Limits of Institutional Reform in Development: Changing Rules for Realistic Solutions. Cambridge: Cambridge University Press. ISBN 978-1139060974. Go to original source...
    4. Barra, C., Ruggiero, N. (2023). Institutional quality and public spending in Europe: A quantile regression approach. Economics & Politics, 35(3), 949-1019. https://doi.org/10.1111/ecpo.12248 Go to original source...
    5. 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 Go to original source...
    6. Belke, A., Domnick, C., Gros, D. (2017). Business Cycle Synchronization in the EMU: Core vs. Periphery. Open Economies Review, 28, 863-892. https://doi.org/10.1007/s11079-017-9465-9 Go to original source...
    7. Bhimjee, D. C. P., Leão, E. R. (2020). Public debt, GDP and the Sovereign Debt Laffer curve: A country-specific analysis for the Euro Area. Journal of International Studies, 13(3), 280-295. https://doi.org/10.14254/2071-8330.2020/13-3/18 Go to original source...
    8. Chang, T., Chiang, G. (2012). Transitional behavior of government debt ratio on growth: The case of OECD countries. Romanian Journal of Economic Forecasting, 15(2), 24-37.
    9. 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 Go to original source...
    10. Chudik, A., Mohaddes, K., Pesaran, M. H., et al. (2013). Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models. Cambridge Working Papers in Economics No. CWPE 1350. Go to original source...
    11. Chudik A., Mohaddes K., Pesaran, M. H., et al. (2017). Is There a Debt-Threshold Effect on Output Growth? The Review of Economics and Statistics, 99(1), 135-150. https://doi.org/10.1162/REST_a_00593 Go to original source...
    12. Equiza-Goñi, J. (2016). Government debt maturity and debt dynamics in euro area countries. Journal of Macroeconomics, 49, 292-311. https://doi.org/10.1016/j.jmacro.2016.01.005 Go to original source...
    13. Eurostat (2024). Government finance statistics. [Retrieved XXXX-XX-XX] Available at: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Government_finance_statistics
    14. Fetai, B., Avdimetaj K., Bexheti A., et al. (2020). Threshold effect of public debt on economic growth: An empirical analysis in the European transition countries. Proceedings of Rijeka Faculty of Economics, 38(2), 381-406. https://doi.org/10.18045/zbefri.2020.2.381 Go to original source...
    15. Fukunaga, I., Komatsuzaki, T., Matsuoka, H. (2021). Inflation and public debt reversals in advanced economies. Contemporary Economic Policy, 40(1), 124-137. https://doi.org/10.1111/coep.12537 Go to original source...
    16. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368. https://doi.org/10.1016/S0304-4076(99)00025-1 Go to original source...
    17. Heimberger, P. (2023). Do higher public debt levels reduce economic growth? Journal of Economic Surveys, 37(4), 1061-1089. https://doi.org/10.1111/joes.12536 Go to original source...
    18. Herndon, T., Ash, M., Pollin, R. (2014). Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge Journal of Economics, 38(2), 257-279. https://doi.org/10.1093/cje/bet075 Go to original source...
    19. Hilscher, J., Raviv, A., Reis, R. (2022). Inflating Away the Public Debt? An Empirical Assessment. The Review of Financial Studies, 35(3), 1553-1595. https://doi.org/10.1093/rfs/hhab018 Go to original source...
    20. Ibañez Martín, M. M., Rojas, M. L., Dabús, C. (2024). Debt, economic growth and threshold effects: Evidence from developing countries. EconomiA, 25(1), 92-108. https://doi.org/10.1108/ECON-08-2023-0131 Go to original source...
    21. IMF (2023). Global Debt Monitor. Washington, D.C.: IMF, Fiscal Affairs Department.
    22. Kacou, K. Y. T., Kassouri, Y., Evrard, T. H., et al. (2022). Trade openness, export structure, and labor productivity in developing countries: Evidence from panel VAR approach. Structural Change and Economic Dynamics, 60, 194-205. https://doi.org/10.1016/j.strueco.2021.11.015 Go to original source...
    23. Kaufmann D., Kraay, A. (2023). Worldwide Governance Indicators. [Retrieved 2024-05-25] Available at: https://www.worldbank.org/en/publication/worldwide-governance-indicators
    24. Kemoe, L., Lartey, E. K. K. (2022). Public debt, institutional quality and growth in sub-Saharan Africa: A threshold analysis. International Review of Applied Economics, 36(2), 222-244. https://doi.org/10.1080/02692171.2021.1957785 Go to original source...
    25. Kim, E., Yoonhee, H., Kim. S. (2017). Public Debt, Corruption and Sustainable Economic Growth. Sustainability, 9(3), 433. https://doi.org/10.3390/su9030433 Go to original source...
    26. Konatar, M., Đurašković, J., Cerović Smolović, J., et al. (2022). Does Public Debt Affect Economic Growth? Panel Evidence from Central and Eastern Europe. Politická ekonomie, 70(5), 574-596. https://doi.org/10.18267/j.polek.1365 Go to original source...
    27. Kose, M., Ohnsorge, F., Sugawara, N. (2022). A Mountain of Debt: Navigating the Legacy of the Pandemic. Journal of Globalization and Development, 13(2), 233-268. https://doi.org/10.1515/jgd-2021-0052 Go to original source...
    28. Kremer, S., Bick, A., Nautz, D. (2013). Inflation and growth: new evidence from a dynamic panel threshold analysis. Empirical Economics, 44, 861-878. https://doi.org/10.1007/s00181-012-0553-9 Go to original source...
    29. Krugman, P. (1988). Financing vs. forgiving a debt overhang. Journal of Development Economics, 29(3), 253-268. https://doi.org/10.1016/0304-3878(88)90044-2 Go to original source...
    30. Law, S. H., Ng, C. H., Kutan, A. M., et al. (2021). Public debt and economic growth in developing countries: Nonlinearity and threshold analysis. Economic Modelling, 98, 26-40. https://doi.org/10.1016/j.econmod.2021.02.004 Go to original source...
    31. Machado, J. A. F., Santos Silva, J. M. C. (2019). Quantiles via Moments. Journal of Econometrics, 213(1), 145-173. https://doi.org/10.1016/j.jeconom.2019.04.009 Go to original source...
    32. Martin, P., Pisani-Ferry, J., Ragot, X. (2021). Reforming the European Fiscal Framework. Les notes du conseil d'analyse économique, 63. Go to original source...
    33. Mencinger, J., Aristovnik, A., Verbič, M. (2014). The Impact of Growing Public debt on Economic Growth in the European Union. Amfiteatru Economics, 16(35), 403-414.
    34. Mohsin, M., Ullah, H., Iqbal, N., et al. (2021). How external debt led to economic growth in South Asia: A policy perspective analysis from quantile regression. Economic Analysis and Policy, 72, 423-437. https://doi.org/10.1016/j.eap.2021.09.012 Go to original source...
    35. Musa K., Janssen M., Said J., et al. (2024). The Impact of Public Debt and Quality of Governance on Economic Growth in High-Income Countries. Journal of the Knowledge Economy, 16, 2817-2843. https://doi.org/10.1007/s13132-024-02073-x Go to original source...
    36. Musa, K., Sohag, K., Said, J., et al. (2022). Public Debt, Governance, and Growth in Developing Countries: An Application of Quantile via Moments. Mathematics, 11(3), 650. https://doi.org/10.3390/math11030650 Go to original source...
    37. Ndoricimpa, A. (2020). Threshold effects of public debt on economic growth in Africa: A new evidence. Journal of Economics and Development, 22(2) 187-207. https://doi.org/10.1108/JED-01-2020-0001 Go to original source...
    38. Onofrei, M., Bostan, I., Firtescu, B. N., et al. (2022). Public Debt and Economic Growth in EU Countries. Economies, 10(10), 254. https://doi.org/10.3390/economies10100254 Go to original source...
    39. Ostrihoň, F., Širaňová, M., Workie Tiruneh, M. (2023). Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter? Panoeconomicus, 70(1), 47-69. https://doi.org/10.2298/PAN181114007O Go to original source...
    40. Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265-312. https://doi.org/10.1002/jae.951 Go to original source...
    41. Pesaran, M. H. (2021). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 60, 13-50. https://doi.org/10.1007/s00181-020-01875-7 Go to original source...
    42. Qureshi, I., Liaqat, Z. (2020). The long-term consequences of external debt: Revisiting the evidence and inspecting the mechanism using panel VARs. Journal of Macroeconomics, 63, 103184. https://doi.org/10.1016/j.jmacro.2019.103184 Go to original source...
    43. Ramos-Herrera, M. del C., Sosvilla-Rivero, S. (2016). An empirical characterization of the effects of public debt on economic growth. Applied Economics, 49(35), 3495-3508. https://doi.org/10.1080/00036846.2016.1262522 Go to original source...
    44. Razzaq, A., Sharif, A., Ozturk, I., et al. (2022). Asymmetric influence of digital finance, and renewable energy technology innovation on green growth in China. Renewable Energy, 202, 310-319. https://doi.org/10.1016/j.renene.2022.11.082 Go to original source...
    45. Reinhart C. M., Rogoff, K. S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573-578. https://doi.org/10.1257/aer.100.2.573 Go to original source...
    46. San, C. K., Chin, L. (2023). Impact of Public Debt on Economic Growth: A Quantile Regression Approach. South Asian Journal of Macroeconomics and Public Finance. 12(2), 250-278. https://doi.org/10.1177/22779787231207218 Go to original source...
    47. Seo, M. H., Shin, Y. (2016). Dynamic panels with threshold effect and endogeneity. Journal of Econometrics, 195(2), 169-186. https://doi.org/10.1016/j.jeconom.2016.03.005 Go to original source...
    48. Seo, M. H., Kim, S., Kim, J. (2019). Estimation of dynamic panel threshold model using Stata. The Stata Journal, 19(3), 685-697. https://doi.org/10.1177/1536867X19874243 Go to original source...
    49. Shah, S. S. A., Dickinson, D., Tao, K., et al. (2024). The Heterogenous Threshold Effects of Public Debt on Economic Growth: Empirical Evidence from Developing Countries. Open Economies Review, 36, 243-280. https://doi.org/10.1007/s11079-024-09756-7 Go to original source...
    50. Tarek, B. A., Ahmed, Z. (2017). Institutional Quality and Public Debt Accumulation: An Empirical Analysis. International Economic Journal, 31(3), 415-435. https://doi.org/10.1080/10168737.2017.1354906 Go to original source...
    51. Turan, T., Iyidogan, P. V. (2023). Non-linear Impacts of Public Debt on Growth, Investment and Credit: A Dynamic Panel Threshold Approach. Prague Economic Papers, 32(2), 107-128. https://doi.org/10.18267/j.pep.825 Go to original source...
    52. Turan, T., Yanikkaya, H. (2021). External debt, growth and investment for developing countries: Some evidence for the debt overhang hypothesis. Portuguese Economic Journal, 20, 319-341. https://doi.org/10.1007/s10258-020-00183-3 Go to original source...
    53. WB (2024). World Development Indicators (WDI). [Retrieved 2024-05-12] Available at: https://databank.worldbank.org/source/world-development-indicators
    54. Zaghdoudi, T. (2020). Threshold effect in the relationship between external debt and economic growth: A dynamic panel threshold specification. Journal of Quantitative Economics, 18(3), 447-456. https://doi.org/10.1007/s40953-019-00182-y Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content