Public debt and growth in Asian developing economies: evidence of non-linearity and geographical heterogeneity

This paper examines the non-linear effects of public debt on economic growth in Asian developing economies using panel Generalized Method of Moments (GMM) regressions and panel vector autoregression (VAR) models. We find a statistically significant non-linear effect of public debt (as a percent of GDP) on GDP per capita growth, with a turning point at 52 percent and 50 percent of GDP for all Asian developing and Asian coastal developing economies, respectively. It is found that asymmetric mutual feedback effects exist between the growth and the public debt depending on the public debt level. The two-way effects are statistically significant and more evident when the public debt exceeds its threshold level. Our results also show evidence of geographical (cross-country) heterogeneity in the mutual feedback effects. These findings have important policy implications, including the need to use geographic (or region)-specific debt threshold levels and asymmetric response coefficients in public debt policy analysis.