Institutional Quality, Public Debt, and Sustainable Economic Growth: Evidence from a Global Panel

Hengyu Shi, Dingwei Song () and Muhammad Ramzan
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Hengyu Shi: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Dingwei Song: School of Management, Jiangsu University, Zhenjiang 212013, China
Muhammad Ramzan: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China

Sustainability, 2025, vol. 17, issue 14, 1-27

Abstract: Achieving sustainable economic growth requires a careful balance between public debt accumulation and the macroeconomic stability necessary for long-term development. While public debt can support growth through productive public investment, excessive debt may crowd out private investment, raise borrowing costs, and undermine financial stability, ultimately threatening economic sustainability. In this context, the quality of institutions plays a pivotal moderating role by fostering responsible debt management and ensuring that debt-financed investments contribute to sustainable development. In this context, this study investigates the relationship between public debt and economic growth, with a focus on the moderating role of institutional quality (IQ). Utilizing an unbalanced panel of 115 countries over the period from 1996 to 2021, this study tests the hypothesis that robust institutional frameworks mitigate the negative impact of public debt on economic growth. To address potential endogeneity, this study employs the dynamic system Generalized Method of Moments (GMM) estimation technique. The results reveal that, although the direct effect of public debt on economic growth is negative, the interaction between public debt and IQ yields a positive influence. Furthermore, the results indicate the presence of a threshold beyond which public debt begins to exert a beneficial effect on economic growth, whereas its impact remains adverse below this threshold. These findings underscore the critical importance of sound debt management strategies and institutional development for policymakers, suggesting that effective government governance is essential to harnessing the potential positive effects of public debt on economic growth.

Keywords: sustainable economic growth; public debt; institutional quality; threshold variable (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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