Threshold Effect in the Relationship Between External Debt and Economic Growth: A Dynamic Panel Threshold Specification

This paper examines the relationship between external debt and economic growth for the middle and low income countries over the period 2002–2016. By performing dynamic panel threshold model, we found that the nexus between external debt and economic growth is nonlinear. Besides, results show that there exist a statistically negative relationship between external debt and economic growth above the threshold level of 15.28%, above which external debt decreases economic growth in the middle and low income countries. This paper supports the view that external debt should be contracted with a reasonable level to avoid the opposite effect on economic growth in the middle and low income countries.