Threshold effects of public debt on economic growth in Africa: a new evidence

Abstract:
Purpose
The purpose of this study is to seek to re-examine the threshold effects of public debt on economic growth in Africa.

Design/methodology/approach
This study applies panel smooth transition regression approach advanced by González et al. (2017). The method allows for both heterogeneity as well as a smooth change of regression coefficients from one regime to another.

Findings
A debt threshold in the range of 62–66% is estimated for the whole sample. Low debt is found to be growth neutral but higher public debt is growth detrimental. For middle-income and resource-intensive countries, a debt threshold in the range of 58–63% is estimated. As part of robustness checks, a dynamic panel threshold model was also applied to deal with the endogeneity of debt, and a much higher debt threshold was estimated, at 74.3%. While low public debt is found to be either growth neutral or growth enhancing, high public debt is consistently detrimental to growth.

Research limitations/implications
The findings of this study show that there is no single debt threshold applicable to all African countries, and confirm that the debt threshold level is sensitive to modeling choices. While further analysis is still needed to suggest a policy, the findings of this study show that high debt is detrimental to growth.

Originality/value
The novelty of this study is twofold. Contrary to previous studies on Africa, this study applies a different estimation technique which allows for heterogeneity and a smooth change of regression coefficients from one regime to another. Another novelty distinct from the previous studies is that, for robustness checks, this study divides the sample into low- and middle-income countries, and into resource- and nonresource intensive countries, as debt experience can differ among country groups. Further, as part of robustness checks, another estimation method is also applied in which the threshold variable (debt) is allowed to be endogenous.