Two old acquaintances: re-examining the relationship between external debt and economic growth in Latin America

Purpose This study aims to investigate the linear and threshold effects of external debt on economic growth in eleven Latin American countries between 1990 and 2023. Design/methodology/approach The generalized method of moments (GMM) is used to estimate the linear effect, given its efficiency in addressing endogeneity, serial autocorrelation and heterogeneity. Threshold regression for panel data (TRP) is also used to examine potential nonlinear relationships. Findings The results yielded three main findings. First, external debt has a significant and negative impact on economic growth. Second, no statistically significant external debt-to-gross domestic product (GDP) threshold was identified, demonstrating that the negative effect of debt persists regardless of its level. Third, an investment threshold was determined that mitigates this negative effect; when gross fixed capital formation exceeds 19.73% of GDP, the adverse impact of debt ceases to be significant, suggesting that investment acts as a debt-absorbing mechanism. Originality/value The research combines complementary econometric approaches to analyze in depth the effects of external debt in a relatively unexplored region like Latin America. Furthermore, it incorporates robustness tests that divide the sample according to the identified investment threshold, providing key empirical evidence for the design of public policies aimed at improving the channeling and efficiency of public borrowing.