When Debt Turns Inflationary: Threshold Effects in the Debt-Inflation Nexus

This study explores the non-linear relationship between public debt and inflation, focusing on identifying debt-to-GDP thresholds beyond which debt accumulation significantly intensifies inflationary pressures. Utilizing a panel dataset of 171 countries across diverse regions including Middle East and Central Asia, Sub-Saharan Africa, Emerging Asia, Emerging Europe, Latin America, and the Euro Area, the study applies a Discrete Panel Threshold Regression (PTR) model to detect critical debt thresholds. The analysis incorporates macroeconomic controls such as GDP growth, primary balance, current account balance, and gross national savings. Our findings reveal substantial regional heterogeneity in threshold levels, ranging from 76% of GDP in Emerging Asia to 92% in the Euro Area, reflecting differences in institutional strength and fiscal credibility. Robustness checks using a Panel Vector Autoregressive (PVAR) model confirm that inflation responds more aggressively to debt shocks once these thresholds are exceeded, underscoring the asymmetric nature of debt-inflation dynamics. These results offer key policy insights, particularly for developing and emerging market economies, emphasizing the importance of maintaining public debt within sustainable limits to mitigate inflationary risks and preserve macroeconomic stability. Jel: E62 H63 E31 H62