Testing Threshold Effects of External Debt: Empirical Evidence From Developing Countries

This study examines external debt threshold levels in a huge sample of developing world during the years 1991 to 2020. Methodologically, dynamic panel threshold model is employed for digging out the endogeneity problem. Using yearly data, we confirm the general consensus that external debt negatively affects output growth when it reaches or is above certain threshold level. In particular, we find total external debt threshold at 90% and long-term external debt threshold at 50.53%, respectively. Furthermore, we find that external debt thresholds evolve over each decade; 1991 to 2000; 2001 to 2010 and 2011 to 2020, respectively. One notable finding is that total external debt threshold levels have declined over the three decades from as high as 92% in 1990s to 54.6% during 2001 to 2010 and 47.8% during 2011 to 2020. Similarly, the long-term threshold levels declined from as high as 83% in 1990s to 23.6% during 2001 to 2010, although it increased slightly to 27% during 2011 to 2020, respectively. To prudent public debt management, our findings suggest fundamental policies for developing countries. JEL Classification: H63, C24, O40, C23.