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Theoretical and Applied Economics
No. 4 / 2015 (605), Winter

Threshold Effect of Public Debt on Domestic Investment: Evidence from Selected African Countries

Walid BENAYED
Faculty of Economics and Management of Sfax, University of Sfax, Tunisia
Foued Badr GABSI
Faculty of Economics and Management of Sfax, University of Sfax, Tunisia
Samia OMRANE BELGUITH
Faculty of Economics and Management of Sfax, University of Sfax, Tunisia

Abstract. In this paper, we study the non-linear relationship between total public debt and domestic investment, across a panel of 10 African economies from 1981 to 2010. Our analysis, based on a panel threshold approach proposed by Hansen (1999), confirms the significance of the nonlinear relationship between public debt and domestic investment. The results indicate that public debt lower than 47.31 percent of GDP is positively associated with domestic investment. However, once the debt exceeds this threshold, the relationship between public debt and investment becomes negative. Moreover, we find some evidence that at this level, public debt limits the government’s ability to undertake countercyclical policies.

Keywords: panel thresholds, nonlinear effect of public debt, investment, crowding-out effect, economic growth.

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