Non-linear Growth-Determinants Nexus: The Role of Sovereign Debt

Po-Chin Wu (), Shiao-Yen Liu and Tsai-Yuan Huang
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Po-Chin Wu: Chung Yuan Christian University
Shiao-Yen Liu: Chung Yuan Christian University
Tsai-Yuan Huang: National Pingtung University

Hacienda Pública Española / Review of Public Economics, 2017, vol. 222, issue 3, 43-63

Abstract: We expand the new growth model as a panel smooth transition regression specification to measure the effects of determinants on growth and the role of debt ratio in the growth-determinants nexus. In the model, we consider new determinants (FDI, export and tourism) and use a two-period lagged debt- GDP ratio as the transition variable. The effects of determinants on growth vary across countries and with time, depending on the value of the transition variable. The threshold of the debt-GDP ratio (73.019%) is a referenced index to set the ceiling of debt-GDP ratio for the fiscal stability. For countries with high debt ratios, the policies to accumulate human capital and promote tourism are more effective in boosting growth than to stimulate domestic physical investment and export. For countries with low debt ratios, the conclusion is opposite. Thus, lowering debt ratio is not always favorable for the contri-butions of individual determinants to growth.

Keywords: Panel smooth transition regression (PSTR) model; debt-GDP ratio; new growth theory; foreign direct investment (FDI); international tourism receipts (search for similar items in EconPapers)
JEL-codes: C23 C24 H63 O40 (search for similar items in EconPapers)
Date: 2017
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