The impact of government debt on the growth and welfare of the society under the golden rule of financial development, applying Star threshold regime change models

Developing countries, especially those with the rent of natural resources, are facing the inefficiency and large size of the government. In many cases, in order to compensate for the structural deficit, countries with natural resource rent create a capital balance surplus in the budget by reducing construction costs and allocate the created capital surplus to current expenses. This has long-term negative lasting consequences for economic growth. In many countries, this approach is not able to compensate the total deficit of the operating balance of the government, and the remaining deficit is financed through borrowing from abroad or the domestic economy. In this study, the impact of government debt on the growth and welfare of the society under the golden rule of financial development during the period of 1365-1399 and the application of the soft transfer threshold approach (STAR) was analyzed. The results of the non-linear part of the model show the existence of a positive relationship between the financial development variable and the economic growth and welfare index. Also, the variables of government size, government budget deficit, oil shock, exchange rate fluctuations and sanctions respectively lead to a decrease; 17%, 14%, 6%, 43% and 2% are economic growth and prosperity. The main channel of influencing financial development is done through increasing investment efficiency, quality of regulations, reducing economic sanctions and governance indicators. Therefore, the way of financial market liberalization, the weakness of financial system management and the lack of formation of coherent financial markets and the benefit of regulations in the country can be considered as the reasons for the reduction of investment efficiency through the non-optimal allocation of resources in the country. As a result, more attention and diligence should be done in the country to develop and make the financial markets more efficient, and as a result, allocate resources more efficiently and increase investment efficiency. Also, due to the strong dependence of the government budget on oil revenues, this dependence should be reduced and attention to tax income should be increased.