Debt’s Shadows on Growth: A Comprehensive Study through Extreme Bound Analysis

Abstract

This research aims to investigate the relationship between public debt and economic growth, specifically to identify the threshold level of public debt to GDP that could potentially pose a threat to economic growth. The study employs the traditional extreme bound Analysis (EBA) approach to find out threshold level. The effectiveness of three extreme bound analysis criteria is also compared using combinations of two, three, and four variables that is basically comparison of different criteria of explanatory variable selection. Furthermore, the research evaluates the differences between traditional and restricted extreme bound analysis approaches to determine which method produces accurate and reliable results. Based on the results of this research, the dummy creation method is used to find out the threshold level of public debt to GDP that could potentially pose a threat to economic growth is 69%. This finding is higher than the threshold level of 62% that was identified in previous studies because of changing economic conditions, policy responses, and external factors. Therefore, my research suggests that governments should be cautious about allowing public debt to exceed 69% of GDP to maintain sustained economic growth. The findings of this research have significant implications for policymakers, as this research provide insights into the relationship between public debt and economic growth, which can inform the development of effective debt management strategies.