Growth and Debt: An Endogenous Smooth Coefficient Approach

摘要

The new growth theories with an emphasis on fundamental determinants such asinstitutions suggest a non-linear cross-country growth process. In this paper, we investigate thepublic debt and economic growth relationship using the semi-parametric smooth coefficient approachthat allows democracy to influence this relationship and parameter heterogeneity in the unknownfunctional form and addresses the endogeneity of variables. We find results consistent with theprevious literature that identified a significant adverse effect of public debt on growth for the countriesbelow a particular democracy level. However, we also find conclusive evidence that countries withhigh institutional quality have an adverse effect of public debt on growth for the period 1980–2009,as well as for the extended period including the years 2010–2014. A 10-percentage point increase inthe debt-to-GDP ratio is associated with a 0.12% and 0.07% decrease in the subsequent 10-year periodreal GDP growth rate for the zero democracy countries and for the countries with a democracy scoreof 10, respectively.