Government Debt and Economic Growth. A Threshold Analysis for Greece

Abstract This study addresses the issue of threshold effects between general government debt and economic growth in Greece over the period 1970–2016. Using threshold models, there is evidence in favour of a negative association between general government debt and economic growth. The results indicate that the magnitude of this negative relationship between debt and growth depends on debt regimes. Also, the results seem to suggest that public debt might be associated with lower growth at low and moderate public debt levels. Specifically, at debt levels lower than 23.5 percent of GDP, increases in the general government debt-to-GDP ratio are associated with higher negative effect on economic growth, than at very high debt levels of 109.4 percent of GDP. The overall results could explain why general government debt was a significant drag on economic growth of Greece and that the crisis is far from over as thresholds are still binding.