Threshold Effects of Public Debt on Economic Growth in the Euro Area Economies

AbstractMany studies in the empirical literature show that public debt is negatively correlated with economic growth but there is no paper that studies the causal links between these variables using rigorous tests based on Granger’s ideas. Accordingly, we investigate the causal links between debt-to-GDP ratio and economic growth using both linear parametric and nonlinear nonparametric Granger causality tests. We focus on 12 euro countries for the period 1970–2012. Our empirical results suggest a unidirectional causality running from debt to economic growth for Spain and Portugal and a bidirectional causality for Belgium, Germany, Greece, Ireland and Italy. No causality in either direction is identified for Austria, Finland, Luxembourg and the Netherlands. Finally, for France, the tests provide evidence for a unidirectional causality running from GDP growth to debt-to-GDP ratio. In addition, the nonlinear tests indicate that overlooking nonlinearities may result in misleading conclusions about Granger causality. Caveats of the analysis, as well as policy conclusions, are also discussed.

Download Full-text

PUBLIC DEBT AND ECONOMIC GROWTH IN EURO AREA COUNTRIES. A WAVELET APPROACH

Technological and Economic Development of Economy ◽

10.3846/tede.2021.14241 ◽

2021 ◽

Vol 0 (0) ◽

pp. 1-24

Author(s):

Ada-Cristina Albu ◽

Lucian-Liviu Albu

Keyword(s):

Economic Growth ◽

Euro Area ◽

Public Debt ◽

Fiscal Sustainability ◽

Short Term ◽

Member States ◽

Time Frequency ◽

Euro Zone ◽

Economic Output

In this paper we propose to analyze the dynamic of the relation between public debt and economic growth rate for Euro area countries by employing a wavelet approach, establishing thus both short-term and long-term correlations between these two variables. In this way we will present time-frequency dependencies between debt and economic growth and differentiate between short term and long-term effects. High levels of public debt have a negative impact on the economic output, because they entail concerns about debt sustainability. Non-linear analysis of the debt-growth nexus shows the existence of thresholds from which rising indebtedness can hamper economic growth. Using wavelet analysis, we demonstrate that there is a strong relation between public debt and economic growth, especially for high frequencies, public debt having a significant impact on economic growth in case of periods situated above 2 years for most Euro Zone member states. High debt levels can cause serious effects on fiscal stability and therefore require fiscal consolidation in order to restore economic growth. Therefore, Euro Zone member states should implement prudent debt policies and establish clear limits for debt increase, in order to comply with fiscal sustainability and ensure conditions for preserving economic growth.

Download Full-text

Public debt and economic growth: Further evidence for the euro area

Acta Oeconomica ◽

10.1556/032.2018.68.2.2 ◽

2018 ◽

Vol 68 (2) ◽

pp. 209-229 ◽

Cited By ~ 9

Author(s):

Marta Gómez-Puig ◽

Simón Sosvilla-Rivero

Keyword(s):

Economic Growth ◽

Euro Area ◽

Public Debt ◽

Negative Impact ◽

Annual Data ◽

Bounds Testing ◽

Distributed Lag ◽

Autoregressive Distributed Lag ◽

Long Run ◽

Short Run

This paper empirically investigates the short and the long run impact of public debt on economic growth. We use annual data from both the central and the peripheral countries of the euro area (EA) for the 1961–2013 period and estimate a production function augmented with a debt stock term by applying the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our results suggest different patterns across the EA countries and tend to support the view that public debt always has a negative impact on the long-run performance of EA member states, whilst its short-run effect may be positive depending on the country.

Download Full-text

Public Debt and Economic Growth Nexus in the Euro Area: A Dynamic Panel ARDL Approach

Scientific Annals of Economics and Business ◽

10.47743/saeb-2020-0016 ◽

2020 ◽

Vol 67 (3) ◽

pp. 291-31ö

Author(s):

Themba Gilbert Chirwa ◽

Nicholas M. Odhiambo

Keyword(s):

Economic Growth ◽

Euro Area ◽

Public Debt ◽

Negatively Associated ◽

Panel Ardl ◽

Long Run ◽

Ardl Approach ◽

Study Results ◽

Short Run ◽

The Relationship

This study investigates the relationship between public debt and economic growth using panel data from 10 European Countries. Using a panel ARDL approach, the results show that public debt, government consumption, and the real exchange rate are negatively associated with economic growth both in the short- and long-run. Furthermore, investment and the real interest rate were found to be positively associated with economic growth both in the short- and long-run. Inflation and trade openness were found to have mixed results: both were negatively associated with economic growth in the long run while in the short run the relationship was positive and consistent across groups with a few exceptions. Second, the study results also showed that debt is nonlinear at the 70% threshold only in the long-run while in the short run the results were consistently negative and across groups. The study results have significant policy implications for the Stability and Growth Pact of the Euro area. It is recommended that member states should ensure fiscal sustainability by balancing their fiscal budgets to effectively reduce the accumulation of public debt as well as implementing structural reforms that will improve the efficiency of investment as well as macroeconomic stability.

Download Full-text

Threshold effects of public debt on economic growth in Africa: a new evidence

Journal of Economics and Development ◽

10.1108/jed-01-2020-0001 ◽

2020 ◽

Vol 22 (2) ◽

pp. 187-207

Author(s):

Arcade Ndoricimpa

Keyword(s):

Economic Growth ◽

Public Debt ◽

Threshold Model ◽

Estimation Method ◽

Regression Coefficients ◽

Smooth Transition ◽

Threshold Effects ◽

Middle Income ◽

Content Type ◽

Smooth Change

PurposeThe purpose of this study is to seek to re-examine the threshold effects of public debt on economic growth in Africa.Design/methodology/approachThis study applies panel smooth transition regression approach advanced by González et al. (2017). The method allows for both heterogeneity as well as a smooth change of regression coefficients from one regime to another.FindingsA debt threshold in the range of 62–66% is estimated for the whole sample. Low debt is found to be growth neutral but higher public debt is growth detrimental. For middle-income and resource-intensive countries, a debt threshold in the range of 58–63% is estimated. As part of robustness checks, a dynamic panel threshold model was also applied to deal with the endogeneity of debt, and a much higher debt threshold was estimated, at 74.3%. While low public debt is found to be either growth neutral or growth enhancing, high public debt is consistently detrimental to growth.Research limitations/implicationsThe findings of this study show that there is no single debt threshold applicable to all African countries, and confirm that the debt threshold level is sensitive to modeling choices. While further analysis is still needed to suggest a policy, the findings of this study show that high debt is detrimental to growth.Originality/valueThe novelty of this study is twofold. Contrary to previous studies on Africa, this study applies a different estimation technique which allows for heterogeneity and a smooth change of regression coefficients from one regime to another. Another novelty distinct from the previous studies is that, for robustness checks, this study divides the sample into low- and middle-income countries, and into resource- and nonresource intensive countries, as debt experience can differ among country groups. Further, as part of robustness checks, another estimation method is also applied in which the threshold variable (debt) is allowed to be endogenous.

Download Full-text