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J. Risk Financial Manag. 2019, 12(1), 23; https://doi.org/10.3390/jrfm12010023

Growth and Debt: An Endogenous Smooth Coefficient Approach

Independent Researcher, Guelph, ON N1G 0G1, Canada
Received: 21 January 2019 / Revised: 25 January 2019 / Accepted: 25 January 2019 / Published: 1 February 2019
(This article belongs to the Special Issue Nonparametric Econometric Methods and Application)
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Abstract

The new growth theories with an emphasis on fundamental determinants such as institutions suggest a non-linear cross-country growth process. In this paper, we investigate the public debt and economic growth relationship using the semi-parametric smooth coefficient approach that allows democracy to influence this relationship and parameter heterogeneity in the unknown functional form and addresses the endogeneity of variables. We find results consistent with the previous literature that identified a significant adverse effect of public debt on growth for the countries below a particular democracy level. However, we also find conclusive evidence that countries with high institutional quality have an adverse effect of public debt on growth for the period 1980–2009, as well as for the extended period including the years 2010–2014. A 10-percentage point increase in the debt-to-GDP ratio is associated with a 0.12% and 0.07% decrease in the subsequent 10-year period real GDP growth rate for the zero democracy countries and for the countries with a democracy score of 10, respectively. View Full-Text
Keywords: functional coefficients; local linear regression; nonparametric 2SLS estimator; series estimator; Solow economic growth convergence model functional coefficients; local linear regression; nonparametric 2SLS estimator; series estimator; Solow economic growth convergence model
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Koroglu, M. Growth and Debt: An Endogenous Smooth Coefficient Approach. J. Risk Financial Manag. 2019, 12, 23.

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