Irfan Alam and Asim Anwar
The aim of this study is to analyze the relationship between public debt threshold and real effective exchange rate of developing countries for the period of 2001 to 2016. This study relies on panel threshold regression model which provides the non-linear nexus between variables and suggests threshold effects in the model. The finding shows the non-linear relationship between public debt and real effective exchange rate and found a single threshold effect. Public debt to GDP ratio is used as a threshold variable in the model and suggests a threshold level of 54.486%. The Single threshold effect split the observations into two regimes to check the effect of public debt on real effective exchange rate once the public debt reached the threshold level. The finding suggests that public debt has significant negative impact on both regimes of real effective exchange rate. Additionally, a set of explanatory variables are used in the study including terms of trade, net export, net foreign asset, inflation and reserves. The study found significant negative effect of terms of trade, net export, and inflation on real effective exchange rate while net foreign assets and reserve has positive effect on real effective exchange rate.
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