Mencinger, Jernej and Aristovnik, Aleksander and Verbic, Miroslav (2014): The Impact of Growing Public Debt on Economic Growth in the European Union. Published in: Amfiteatru Economics , Vol. 16, No. 35 (February 2014): pp. 403-414.
Download (362kB) | Preview
The paper attempts to empirically explore the transmission mechanism regarding the short-term impact of public debt and growth. We examine and evaluate the direct effect of higher indebtedness on economic growth for countries in the EU which are in the epicentre of the current sovereign debt crisis. In comparison to similar empirical studies, our research will add to the existing literature by extending the sample of countries and providing the latest empirical evidence for a non-linear and concave (i.e. inverted U-shape) relationship. The empirical analysis primarily includes a panel dataset of 25 sovereign member states of the EU. Our sample of EU countries is divided into subgroups distinguishing between so-called ‘old’ member states, covering the period 1980–2010, and ‘new’ member states, covering the period 1995–2010. In order to account for the impact of the level of the debt-to-GDP ratio on the real growth rate of GDP, we employ a panel estimation on a generalized economic growth model augmented with a debt variable, while also considering some methodological issues like the problems of heterogeneity and endogeneity. The results across all models indicate a statistically significant non-linear impact of public debt ratios on annual GDP per capita growth rates. Further, the calculated debt-to-GDP turning point, where the positive effect of accumulated public debt inverts into a negative effect, is roughly between 80% and 94% for the ‘old’ member states. Yet for the ‘new’ member states the debt-to-GDP turning point is lower, namely between 53% and 54%. Therefore, we may conclude that the threshold value for the ‘new’ member states is lower than for the ‘old’ member states. In general, the research may contribute to a better understanding of the problem of high public debt and its effect on economic activity in the EU.
|Item Type:||MPRA Paper|
|Original Title:||The Impact of Growing Public Debt on Economic Growth in the European Union|
|Keywords:||fiscal policy, public debt, economic growth, panel analysis, turning points, EU|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy
H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt
O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
|Depositing User:||Aleksander Aristovnik|
|Date Deposited:||28. Jan 2014 15:21|
|Last Modified:||03. Jul 2015 04:01|
Abbas, A.S.M. and Christensen, J.E., 2007. The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low-income Countries and Emerging. IMF Working Paper 07/127, Washington, DC: IMF.
EC, 2013.Annual macro-economic (AMECO) database.[online] Brussels: European Commission. Available at:<http://ec.europa.eu/economy_finance/db_indicators/ameco/> [Accessed 10 May 2013].
Cameron, A.C. and Trivedi, P.K., 2010. Macroeconometrics Using Stata (Revised Edition), Texas: StataCorp LP College Station.
Cecchetti, S.G., Mohanty, M.S. andZampolli, F., 2010. The Future of Public Debt: Prospects and Implications. BIS Working Papers No. 300, Basel: Bank for International Settlements.
Cecchetti, S.G., Mohanty, M. S. andZampolli, F., 2011.The Real Effects of Debt.BIS Working Papers No. 352, Basel: Bank for International Settlements.
Checherita, C. and Rother P., 2010. The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area. ECB Working Paper Series No. 1237, Frankfurt: ECB.
Clements, B., Bhattacharya, R. and Nguyen, T.Q., 2003. External Debt, Public Investment and Growth in Low-income Countries.IMF Working paper 03/249, Washington, DC: IMF.
Dobrescu, E., 2011. Some Issues Involved by the Policies Concerning Exchange Rate and Inflation. Quantitative Approach. Amfiteatru Economic, 13(29), pp. 250–257.
Dragos, C. and Dragos, S.L., 2012. Econometric Estimations of the Services and Financial Sector Impact on Economic Growth Variations in Times of Crisis.Amfiteatru Economic [Special Issue], 14(6), pp. 621–634.
Elmendort, D.W. andMankiw G.N., 1998.Government Debt.NBER Working Paper 6470, Cambridge, MA: National Bureau of Economic Research.
Eurostat, 2011.Structure of Government Debt.[online] European Commission, Eurostat, Statistics Explained. Available at:<http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Structure_of_government_debt> [Accessed 9 May 2013].
Heston A., Summers R. and Aten B., 2012. Penn World Table Version 7.1.[online] Philadelphia, PA: Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania. Available at: <https://pwt.sas.upenn.edu/> [Accessed 15 April 2013].
Imbs, J. andRanciere, R., 2005. The Overhang Hangover.World Bank Policy Research Working Paper No. 3673,Washington, DC: World Bank.
IMF, 2011.Public Sector Debt Statistics: Guide for Compilers and Users. Washington, DC: IMF.
IMF, 2012.World Economic Outlook Database October 2012. [online] Washington, DC: IMF. Available at: <http://www.imf.org/external/ns/cs.aspx?id=28> [Accessed 20 April 2013].
Krugman, P., 1988. Financing vs. Forgiving a Debt Overhang: Some Analytical Issues.NBER Working Paper No. 2486, Cambridge, MA: National Bureau of Economic Research.
Kumar, M.S. and Woo, J.,2010. Public Debt and Growth.IMF Working Paper 10/174, Washington, DC: IMF.
Miller, T. and Foster, J.D. (2012).Public Debt, Economic Freedom, and Growth.[online] Washington, DC: The Heritage Foundation. Available at: <http://www.heritage.org/index/book/chapter-3> [Accessed 15 April 2013].
OECD, 2010. Central Government Debt: Statistical Yearbook 2010. Paris: OECD Publishing.
OECD,2013.OECD.Stat (database).[online] Paris: OECD. Available at: <http://www.oecd-ilibrary.org/statistics> [Accessed 13 April 2013].
Onofrei, M. and Lupu, D., 2012. The Management of Economic Decline and the Dimension of Organizational Change. Amfiteatru Economic, 14(32), pp. 470–484.
Padoan, P.C., Sila, U. and Van den Noord, P., 2012. Avoiding Debt Traps: Financial Backstops and Structural Reforms.Economics Department Working Paper No. 976, Paris: OECD.
Pattillo, C., Poirson, H. and Ricci, L., 2002. External Debt and Growth.IMF Working Paper 02/96, Washington, DC: IMF.
Pattillo, C., Poirson, H. and Ricci, L., 2004. What are the Channels through Which External Debt Affects Growth?.IMF Working Paper 04/15, Washington, DC: IMF.
Raskovic, M. and Moerec, B. 2012.Organizational Change and Corporate Sustainability in an Economic Crisis: Evidence from Slovenia. Amfiteatru Economic, 14(32), pp. 522–536.
Reinhart, C.M. and Rogoff, K.S., 2010a. Growth in a Time of Debt.American Economic Review, 100(2), pp. 573–578.
Reinhart, C.M. and Rogoff, K.S., 2010b. Debt and Growth Revisited. MPRA Paper No. 24376, Munich: Munich University Library.
Sala-i-Martin, X., Doppelhofer, G. and Miller, R., 2004. Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach. American Economic Review, 94(4), pp. 813–835.
Schclarek, A., 2004. Debt and Economic Growth in Developing and Industrial Countries.Working Paper No. 34. Lund, Sweden: Department of Economics, School of Economics and Management, Lund University.
Tanzi, V. andSchuknecht, L., 1997.Reconsidering the Fiscal Role of Government: The International Perspective.The Economic Review, 87(2), pp. 164–168.
WDI, 2012.World Development Indicators & Global Development Finance. Washington, DC: The World Bank. Available at: <http://databank.worldbank.org/ddp/home.do?Step=1&id=4> [Accessed 15 April 2013].
Yilanci, V., 2012.Investigating Asymmetries in Macroeconomic Aggregates of Central and Eastern European Economies. Amfiteatru Economic, 14(31), pp. 223–229.