Determining the Threshold of Public Debt in the Western Balkan Countries

Public debt is a very important tool that allows countries to access finance and reach their goals. However, taking a high amount of debt, more than a country can handle, can hamper economic growth or even cause an economic downturn. That is why it is very important for countries to manage their debt effectively so that the debt is sustainable and contributes to economic growth. Each country can tolerate a different level of debt without it causing trouble for its economy, and it is quite important for them to find the point where if the public debt exceeds, it might negatively impact their economy. This research paper intended to find if public debt affects economic growth by using the fixed effect and random effects model and then using the Hausman test to decide which model is more appropriate, as well as the threshold of public debt in Western Balkan countries, by using the pooled OLS model, to determine if a non-linear relationship exists between public debt and economic growth and finding the turning point. According to the obtained results, a non-linear inverted U-shaped relationship exists, and the results suggest that public debt positively impacts economic growth until it reaches 46% of the GDP, and if the debt exceeds this level, it starts to negatively impact economic growth.