Archive for month: March, 2020

The aim of this paper is to analyse the relation between quality of institutions, external debt and economic growth in the CFA zone. The main contribution of this paper is the endogenous determination of the threshold for quality of institutions beyond and above which external debt affect economic growth differently. The methodology focuses on the estimation of a Panel Smooth Transition Regression (PSTR) model inspired by González et al. (2005). The sample includes 10 countries on the period 1985-2015 on annual frequency. From the empirical analysis, we derive the following conclusions: in countries with lower corruption and a high level of democracy, the level of debt for which the effect of debt on growth becomes negative is higher. This implies that poor institutional quality prevents a country from taking full advantage of its credit opportunities. As a result, only countries with good institutions can fully benefit from the advantages of external debt for economic growth.