Impact of the External Debt on Standard of Living: A Case of Asian Countries

This study discusses the basic purpose of external debt: to finance poverty alleviation and bring progress in a country in a time of crisis rather than increase the burden on the economy. Several empirical studies explored the concept of optimal debt, but they often assume a particular nonlinear specification. This study examines the impact of long run and short run external debt on the living standard for selected 23 high indebted Asian countries for the time period 1980-2020. The quadratic effects of external debt are assessed using the Two-Step Panel Quantile ARDL model. This model controls the unobserved heterogeneity, serial correlation, miss-specification and non-normality to ensure robust debt effect on living standards. This study reveals diminishing returns in external debt, whereby debt will be harmful to the standard of living beyond the estimated threshold. The estimated model also proposes that small and effective debt-based policy interventions are beneficial.