The Effect of Public Debt on Economic Welfare in Iran: Threshold Regression Approach
Subject Areas : Financial Economics
1 - Reza Maaboudi (Corresponding Author)Assistant Professor, Faculty Member of the Department of Economics, Faculty of Humanities, Ayatollah Ozma Borujerdi University, Borujerd, Iran.
Keywords: Public Debt, , Economic Welfare, Threshold Regression, Approach, Iran.,
Abstract :
Understanding the public debt impact on the economy enables policymakers to promote the economic welfare of society through appropriate policy adoption. According to the importance of the subject, the present research investigated the public debt effect on the economic welfare of Iran during 1981-2020 using the threshold regression approach. The findings show that the threshold value for public debt is 35%. In both regimes, public debt has a negative and significant effect on economic welfare, with the difference that after crossing the threshold level, the intensity of public debt impact on economic welfare rises remarkably. Also, economic growth and government size have an increasing and significant impact, and inflation has a declining and significant influence on economic welfare. In Iran's economy, the non-optimal allocation of public debt and its low share in productive activities lead to a decrease in investment and real product. A greater increase in public debt with defects in the tax system and the oil revenues instability reduces the government's ability to debt repayment. Eventually, government borrowing from the banking system is accompanied by a rise in fiat money and inflation. As a result, the increase in public debt reduces the economic welfare of the country.
