The threshold effect of government’s external debt on economic growth in emerging countries

Abstract

This paper aims to examine the threshold effect of Government’s external debt on economic growth in a group of 10 emerging countries. By employing panel data of 10 countries for the period from 2005 to 2015, our empirical results indicate that the threshold of Government’s external debt to domestic product (GDP) ratio is 33.17%. We estimate that 1% rise in government external debt ratio corresponds with 0.056% rise in GDP at the level lower than 33.17% of GDP, showing a positive correlation between economic growth and the explanatory variables namely external debt. However, every additional 1% rise in debt-to-GDP ratio beyond the debt threshold costs 0.02% of annual average GDP growth.