Nonlinear public debt effect on economic growth: a dynamic panel threshold method

Purpose The main objective of this research is to investigate empirically the nonlinear dynamic panel public debt threshold impacts on economic growth in European emerging countries from 2008 to 2022. The study seeks to determine the threshold level of public debt below which it will have a beneficial influence on economic growth and beyond which it will have a harmful influence. Design/methodology/approach To estimate the dynamic non-linear relationships between public debt and economic growth, the study employs a dynamic panel threshold model developed by Kremer et al. (2013) that expands on Hansen’s (1999) original static threshold specification. Findings The findings indicate that in the economies of European emerging countries, 79.40% is the turning point for the public debt-to-GDP ratio. Hence, the results indicate that European emerging economies that already have public debt beyond the threshold value should take measures to reduce their debt level in order to promote long-term economic growth. Practical implications The research offers insightful evidence and cautionary warnings to the European emerging countries about the level of public debt in terms of targeting public debt to stimulate growth. Originality/value The paper contributes to the existing literature by identifying a dynamic threshold effect of the public debt-to-GDP ratio and the role of government in the European emerging countries in determining the levels of public debt in these countries.