The Relationship between Public Debt and Economic Growth: Nonlinearity and Country-Specificity

After having tested whether public debt GDP ratio and real GDP per capita are cointegrated by means of the bounds testing procedure, the possible nonlinearity in the relationship between public debt GDP ratio and economic growth is examined for 17 OECD countries taken separately over the 1970-2014 period. The corresponding debt-value threshold is endogenously estimated following Hansen (1996, 1999)'s methodology, while simultaneously controlling for additional growth determinants. The findings reveal that the impact of the public debt ratio on economic growth, cointegration and nonlinearity between these two variables, as well as the debt-value thresholds are all country-specific. Thus, analyzing the link between public debt ratio and economic growth for one country individually is revealed to be essential for governments to shape appropriate fiscal policy guidelines