THE RELATIONSHIP BETWEEN THE PUBLIC DEBT AND ECONOMIC GROWTH: THE CASE OF UPPER-MIDDLE-INCOME EUROPEAN COUNTRIES

Abstract

Most results from numerous studies show that the public debt rate has a negative effect on economic growth (Misztal, 2021; Panizza & Presbitero, 2014; Afonso & Alves, 2015; Reinhart & Rogoff, 2010a). Therefore, the aim of this paper is to empirically analyze the relationship between the public debt and economic growth for 16 upper-middle-income European countries for the period from 2000 to 2020. Our sample consists of three subgroups: the countries of the Western Balkans, upper-middle-income countries states members of the European Union (EU), and other developing European countries. The study employs panel regression models such as ordinary least squares (OLS), fixed-effects, and random-effects models, in order to test the relationship of the public debt-to-gross domestic product (GDP). Almost all models indicate that the relationship between debt-to-GDP is weakly negatively correlated with economic growth, where a 1% increase in debt-to-GDP decreases economic growth by 0.034%, even the average debt-to-GDP of our sample is 35.02%. Moreover, the findings of this study contribute to the literature regarding the public debt ratio and economic growth in developing countries.