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

When Debt Turns Inflationary: Threshold Effects in the Debt-Inflation Nexus | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article When Debt Turns Inflationary: Threshold Effects in the Debt-Inflation Nexus Elwaleed Ahmed TALHA This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-7280053/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract 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 Macroeconomics Fiscal Policy Debt Inflation Budget Balance Full Text Additional Declarations The authors declare no competing interests. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-7280053","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":494760973,"identity":"a0f5d9c0-b10e-4fd9-bd62-7daeec9fd6bb","order_by":0,"name":"Elwaleed Ahmed TALHA","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA70lEQVRIiWNgGAWjYDACdiB+wMDA2MDAA2Sx2UBE8AJmIE5AaEmDiJCi5TBhLfzMPIYfEipsZBvYzx7d8KHsvDw/MwPjh485uLVINvMYSyScSTNu4MlLuznj3G3Dmc0MzJIzt+HWYnCYd4NEYtvhxAaGHLPbvG23GTccZmBj5sWjxf4w7+Yfif/+JzbwvzG7/bftnD1BLQZAWYnEhgOJDRJAWxjbDiQS1CJxmP+bRcKxZOM2iTdmN3vOJSfPbGZsxusX/va25Bsfauxk+/lzzG78KLOz7WdvPvjhIx4tcMCGYALjaBSMglEwCkYBZQAAdcxQurjxxSkAAAAASUVORK5CYII=","orcid":"https://orcid.org/0000-0002-3355-382X","institution":"Senior Economist","correspondingAuthor":true,"prefix":"","firstName":"Elwaleed","middleName":"Ahmed","lastName":"TALHA","suffix":""}],"badges":[],"createdAt":"2025-08-02 19:16:34","currentVersionCode":1,"declarations":{"humanSubjects":false,"vertebrateSubjects":false,"conflictsOfInterestStatement":false,"humanSubjectEthicalGuidelines":false,"humanSubjectConsent":false,"humanSubjectClinicalTrial":false,"humanSubjectCaseReport":false,"vertebrateSubjectEthicalGuidelines":false},"doi":"10.21203/rs.3.rs-7280053/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-7280053/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":88329492,"identity":"bf801529-864a-4a32-8305-eb13aea340dd","added_by":"auto","created_at":"2025-08-05 10:29:15","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1332338,"visible":true,"origin":"","legend":"","description":"","filename":"manuscrpt.pdf","url":"https://assets-eu.researchsquare.com/files/rs-7280053/v1_covered_df67b712-599e-4b15-8395-30312525bab1.pdf"}],"financialInterests":"The authors declare no competing interests.","formattedTitle":"\u003cp\u003e\u003cstrong\u003eWhen Debt Turns Inflationary: Threshold Effects in the Debt-Inflation Nexus\u003c/strong\u003e\u003c/p\u003e","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Fiscal Policy, Debt, Inflation, Budget Balance ","lastPublishedDoi":"10.21203/rs.3.rs-7280053/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-7280053/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis 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. 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