Nonlinear Analysis of Economic Growth, Public Debt and Policy Tools

Abstract

This paper empirically analyzes the nonlinear relation between real GDP growth per capital and public debt by employing ADL test for threshold cointegration method. Empirical results show that there exists a threshold cointegration relationship between public debt and real GDP growth per capital. In case of the empirical results, cutting public debt could boost economic growth in the long-term. However, the short term variation of public debt makes little impact on real output per capital. Comparatively speaking, human capital and investment rate and trade openness make larger influence on real GDP growth per capital. From the perspective of economic policy, the government should take full advantage of the fiscal policy to cut public debt with the operation space of monetary policy being compressed.