Role of Institutional Quality in Mediating Debt and Macroeconomic Stability: A Study of Developing Countries

Ezza Rahman; Risna Triandhari; Raden Parianom

doi:10.15408/etk.v25i2.49543

Authors

Ezza Alan Rahman Faculty of Economics and Business, Universitas Indonesia
Risna Triandhari Faculty of Economics and Business, and Centre of Islamic Economics and Business, Universitas Indonesia
Raden Parianom Universitas Pembangunan Nasional Veteran Jakarta

DOI:

https://doi.org/10.15408/etk.v25i2.49543

Keywords:

institutional quality, macroeconomic stability, dynamic panel threshold regression, fiscal sustainability

Abstract

Research Originality: This study identifies a specific institutional quality threshold at which the effect of government debt on macroeconomic stability in developing countries shifts from negative to positive.

Research Objectives: It examines this threshold effect across 47 developing countries from 2002 to 2023.

Research Method: The analysis uses panel fixed-effects and dynamic panel threshold regression models, with macroeconomic stability as the dependent variable, government debt as the key independent variable, and institutional quality as both an independent and threshold variable.

Empirical Results: Government debt negatively affects macroeconomic stability; however, once institutional quality exceeds the threshold of 40.74, the relationship reverses, and government debt contributes positively. This threshold exceeds those reported in prior studies, reflecting the inclusion of the 2008–2009 and 2020–2021 crisis periods as control variables.

Implications: Developing countries should treat institutional strengthening as a fiscal prerequisite. Once institutional quality crosses the threshold, governments can use debt as a productive instrument of stabilization rather than a source of vulnerability.

JEL Classification: E63, H63, O44, C33

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