Research On The Threshold Effect Of Government Debt On Economic Growth

After the financial crisis broke out in 2008,many countries adopted expansionary fiscal and monetary policies to avoid macroeconomic recession.A series of stimulating policies adopted by the government during the crisis have played a positive role in stabilizing the macro-economy,but they have also caused a rapid expansion of government debt.The European sovereign debt crisis that broke out in 2009 is more indicative of the seriousness of the government debt problem.After the European debt crisis,scholars conducted a lot of research on the relationship between government debt and economic growth,but it has not been conclusive.This paper mainly explores whether there is a threshold effect between government debt and economic growth;if the threshold effect exists,what is the level of debt turning point;whether there is a difference in the debt turning point between emerging market countries and developed countries.Based on the panel data of 52 countries from 1980 to 2015,this paper introduces the quadratic term of debt burden rate into the econometric model in view of the conditional convergence equation,and uses the time individual fixed effect to estimate the threshold effect between government debt and economic growth.And using stochastic simulation to obtain the debt turning point of government debt to economic growth and its 95%confidence interval;due to the endogenous problem of government debt,this paper uses the instrumental variable method to re-estimate the benchmark model,hoping to get more accurate Empirical results.After empirical analysis,we can get the following four conclusions:First,there is a threshold effect between government debt and economic growth.The empirical results show that the quadratic parameter estimates of debt burden rate are significant and negative,so we can determine the nonlinear relationship between government debt and economic growth;When the government debt burden rate is lower than the debt turning point,government debt plays an active role in smoothing private consumption and increasing the aggregate demand,which will promote economic growth.When the government debt burden rate is higher than the debt turning point,theincrease of government debt willsqueeze private investment out and bringserious inflationary pressures that can hinder economic growth.Second,the debt turning point of emerging market countries is higher than that of developed countries.In this paper,through the stochastic simulation of the debt turning point,the debt turning point ofemerging country countries adopting the time individual fixed effect,2SLS and GMM is 95.11%,109.72%,113.01%,the debt turning point of developed countries is 85.50%and 94.26%,98.67%.We can find that the debt turning point of emerging market countries is significantly higher than developed countries;the difference may be due to the fact that emerging market countries use funds raised by debt to finance public goods that are conducive to the development of the economy,which will create more for private individuals.If there are many investment opportunities,the government debt turning point will reach a high level.The debts of developed countries are mostly used to improve the welfare of the residents and narrow the gap between the rich and the poor.Therefore,compared with the emerging market countries,they have less productive characteristics,so the debt turning point will come at a lower debt level.Third,the economic growth of emerging market countries and developed countries are characterized by convergence.Our empirical results show that the actual per capita GDP logarithmic parameter is negative and significant at 1%significance level in different models,indicating that economic growth in both emerging and developed countriesshows a convergence characteristic;fourth,the improvement of the financial development will hinder economic growth.The empirical results shows that the parameters of financial development are estimated to be negative and the estimates are significant.Relevant research shows that there is also a non-linear relationship between financial development and economic growth.When a country’s financial system develops to a certain stage,it will hinder economic growth.The possible innovations in this paper are as follows:First,the econometric model used in this paper is based on the conditional convergence equation,and the quadratic term of the debt burden rate is introduced into the model to construct the threshold effect,and the debt burden rate is estimated by panel regression.Whether the parameter value of the quadratic term is significant to judge if there is a threshold effect between government debt and economic growth,this method is quite different from the traditionalthreshold effect model.Second,this paper uses the Bootstrap method to perform repetitive random sampling onthe data set used in the empirical calculation,and the debt turning point is calculated by combning the estimated parameter values.The 95%confidence interval of the debt turning point is calculated according to the percentile method.This method cannot be directly completed in Stata software.Using the prepared Sinulation8 program to complete the empirical calculation.Third,after the European debt crisis,scholars have studied the debt problems of developed countries,but lack sufficient research for emerging market countries.This paper will use the data in the countries based on the IMF classification criteria.Divided into emerging market countries and developed countries,respectively Empirical test,with a view to a deeper understanding of the threshold effect of government debt and economic growth.The shortcomings of this paper are as follows:First,in the empirical study of the threshold effect of government debt on economic growth,in order to simplify the problem,the dynamic change of the threshold is not considered,and the threshold in the threshold effect is assumed to be unique.In fact,the threshold of government debt may he dynamic and may have multiple thresholds.Second,when studying the threshold effect of government debt on economic growth,this paper only estimates the existence and threshold level of the threshold effect,and There is no research on the transmission mechanism of government debt to economic growth,and this has important academic value for further study of the impact of government debt on economic growth.