Geography and Regional Planning

Geography and Regional Planning

Investigating the Nonlinear Relationship Between Public Debt and Economic Growth with Emphasis on Institutional Quality in Developed Countries

Authors
1 Department of Economics, Central Tehran Branch, Islamic Azad University, Tehran, Iran
2 Department of Economics, Faculty of Economics and Social Sciences, University of Hamadan, Hamadan, Iran
10.22034/jgeoq.2026.583189.4459
Abstract
This study uses the Panel Smooth Transition Regression (PSTR) model to examine the nonlinear interactions between public debt and economic growth, with an emphasis on the role of institutional quality in developed countries during the period 2008-2023. The empirical findings confirm the existence of two distinct behavioral regimes and show that the impact of public debt on economic growth is a function of the level of "institutional quality" and "natural resource rent intensity." The results of nonlinearity tests show that the linear model is rejected and the PSTR model with a transfer function and two thresholds for natural resource rent is the most appropriate model to explain the data; in such a way that two distinct behavioral regimes are identified, including the "low rent regime" and the "high rent regime." According to the estimates, the government debt-to-GDP ratio has a negative and significant effect on economic growth in both regimes, and the intensity of this effect is greater in the high rent regime. In contrast, institutional quality, human development index, and degree of globalization have a positive and significant effect on growth in both regimes, and the interaction term of debt and institutions shows that high-quality institutions can partially neutralize the negative consequences of debt on growth. Natural resource rent has a negative and significant effect on growth in both regimes, and at higher levels of rent, this effect is intensified, confirming the emergence of a “resource curse” even in developed economies.
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