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This paper contributes to the limited literature on the factors conditioning the turning point of the public debt–growth relationship. A decade after the global financial crisis, when the debt ratio in many countries was still above pre-crisis levels, the COVID-19 pandemic again increased the pressure on public finances. It revived the debate on the ability to promote economic recovery through debt-financed government expenditure. However, more intense government borrowing increases its costs and uncertainty about future taxation policy, thus potentially disturbing private consumption, investment, and economic growth. In this paper, we estimate the thresholds of indicators on which the expenditure multiplier depends, which may already imply a risk that public debt will dampen economic growth. We use a methodology of structural threshold regression to examine the varying effects that debt might have on growth using consumption, investment, taxes, and imports as threshold variables, as well as several other factors suggested by previous contributions. The applied methodology allows for the addressing of parameter heterogeneity and endogeneity to be accounted for at the same time. The main results suggest that a positive debt effect is more likely if the conditions for a high expenditure multiplier are met, that an increase in the public-debt-to-GDP ratio is not necessarily deleterious to growth if shares of private consumption and investment in GDP are high, while the tax-revenue-to-GDP ratio is low.

Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

This paper contributes to the limited literature on the factors conditioning the turning point of the public debt–growth relationship. A decade after the global financial crisis, when the debt ratio in many countries was still above pre-crisis levels, the COVID-19 pandemic again increased the pressure on public finances. It revived the debate on the ability to promote economic recovery through debt-financed government expenditure. However, more intense government borrowing increases its costs and uncertainty about future taxation policy, thus potentially disturbing private consumption, investment, and economic growth. In this paper, we estimate the thresholds of indicators on which the expenditure multiplier depends, which may already imply a risk that public debt will dampen economic growth. We use a methodology of structural threshold regression to examine the varying effects that debt might have on growth using consumption, investment, taxes, and imports as threshold variables, as well as several other factors suggested by previous contributions. The applied methodology allows for the addressing of parameter heterogeneity and endogeneity to be accounted for at the same time. The main results suggest that a positive debt effect is more likely if the conditions for a high expenditure multiplier are met, that an increase in the public-debt-to-GDP ratio is not necessarily deleterious to growth if shares of private consumption and investment in GDP are high, while the tax-revenue-to-GDP ratio is low.