Analyzing the Threshold Impact of Public Debt on Economic Growth: an Investigation of the New Member States within the European Union

Abstract

This paper aims to analyze the impact of public debt on economic growth in eleven EU new member states (NMS) from Central and South-Eastern Europe for the period 2000-2019. More specifically, we investigate if there is evidence of a non-linear (quadratic) relationship in this group of countries. Having in mind different economic and financial development, historical connections, and geographical proximity, we split them into three more homogenous groups: Balkan countries (BAL-4), Baltic countries (B-3), and Visegrad countries (VIS-4). The results of our study in all models indicate a statistically significant non-linear impact of public debt ratios on annual GDP per capita growth rates. The results across all models show a significant non-linear impact of public debt ratios on annual GDP per capita growth rates. Further, the calculated debt-to-GDP turning point, where the positive effect of accumulated public debt inverts into a negative effect, is roughly between 42.7%-58% of GDP, dependent on which sub-group we have analyzed. In general, the research may contribute to a better understanding of the problem of high public debt and its effect on economic activity in the new EU.