The Non-Linear Relationship Between Economic Growth and Public Debt

This paper examines the non-linear relationship between public debt and economic growth while controlling for governance quality in a sample of 36 countries over the period 1990-2013 using a Panel Smooth Transition Regression (PSTR) framework. We document clear evidence of non-linearity in the impact of public debt on economic growth. Results from the PSTR model show that institutional quality including the level of respect for rules of law, low level of corruption and government stability influences the level of public debt, and its impact on economic growth.