Threshold level of Public Debt for South Asian Countries
Author: Zobia Saeed

Recent strand of literature on debt is focused on estimation of threshold level above which economic growth is impaired. The objective of this empirical study is to assess the level of public debt-to-GDP beyond which debt is bad for growth. A panel dataset of South Asian countries (Pakistan, India, Bangladesh, Sri Lanka, Nepal) comprising more than 98 percent of total population of South Asia over the period 1970-2016 is employed to estimate the threshold level of public debt. Capital accumulation is used as channel through which debt effects growth. Threshold regression methodology developed by Hansen (1999) is used for estimation. The method estimates threshold and regression slopes using fixed effect transformations and a non-standard asymptotic theory of inference is employed, which allows construction of confidence intervals and testing of hypothesis. The level of public debt above which the growth starts being a burden is 61 percent of GDP for South Asian countries. The coefficient of gross-capital-formation is 0.21 before threshold level of debt while after this threshold, its value declines to 0.13. Developing countries are not better capable of spending domestic and foreign borrowings effectively and prudently. So costs that these developing countries pay include flight of capital, investment is discouraged in the country, policies become volatile and private investment is crowded out as these problems accompany where levels of debt are high. Hence in case of most of the developing countries, benefits of added resources that come in form of loans in are usually overshadowed by ailments that come along debt overhang. Supervisor:- Dr. Attiya Yasmin Javid

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Supervisor: Attiya Yasmin Javid

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