Public Debt and Economic Growth in the Western Balkan Countries

The paper empirically examines the relationship between public debt and economic growth in the Western Balkan countries during the period from 1995 to 2017 (both years inclusive). The study attempts to identify and determine the threshold values or the extent to which public debt-to-GDP ratio has a positive effect on economic growth, and beyond which point debt has a negative effect on the economic growth in Western Balkans countries. For this purpose, we employ different econometric models and techniques such as pooled OLS, fixed and random effects models, and GMM (Generalized Method of Moments). The results are consistent with the theoretical hypothesis that lower level of public debt has a positive effect on economic growth, and beyond certain threshold level it inverts into a negative effect on economic growth. The results show that the debt-to-GDP ratio turning point is between 50% and 60%, which means that any increase of public debt up to this point has a positive impact on economic growth, however, it inverts to a negative effect beyond this point. The findings of this study are useful for governments of Western Balkans countries, since it provides them with useful information about the level of public debt, i.e. the point at which the positive effects of public debt on economic growth turn negative.