Re-Visiting the Debt–Output Nexus from the Perspectives of Long-Term Trend and Short-Term Volatility: An Application of the Threshold Model

Using the Hamilton filter and the panel threshold model, this study provides new evidence of the threshold effects of debt on output in 14 Asia-Pacific countries over the period 2005 to 2019. In the long term, we found a threshold debt value of 73.5 percent of GDP, below which debt has a positive effect on GDP, and the positive effect turns negative when debt goes above the threshold level. In the short term, we noted that debt volatility reduces output volatility, and the impact is greater with larger negative fluctuations in debts. The findings have important policy implications.