Threshold Effect of Public Debt on Economic Growth: An Empirical Investigation for Selected North African Countries

Abstract

In this paper, we examine the non-linear relationship between public debt and economic growth, using panel data for 4 North African countries (Tunisia, Algeria, Morocco and Egypt) from 2003 to 2012. Applying a Panel Threshold Regression (PTR) model proposed by Hansen (1999), we got empirical results indicating that public debt lower than 42,8% of GDP is positively effected by economic growth. However, beyond this threshold of public debt, this relationship becomes negative, which implies that public debt seems to reduce economic growth. Therefore, the policy implication is to address fiscal consolidation and reduce public debt so as to stimulate the economic growth of the 4 North African countries.