Public Debt, Capital Accumulation, and Economic Growth: Is there a Nonlinear Relationship?

There have been many efforts to resolutely determine the net effects of public debt on economic growth. For various reasons, much of these efforts have focused on developed countries. The conclusions are varied -- with the balance swinging toward a negative linear effect of debt on economic growth. This paper focuses on the effects of debt on physical and human capital investments and economic growth. A Solow growth model is derived that incorporates public debt in the capital accumulation process. Cointegration and error-correction models are estimated for a panel data set. The empirical findings suggest a nonlinear effect of public debt on physical capital accumulation and economic growth. However, the optimal or threshold level is country specific.