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Heterogeneity in the debt-growth nexus: Evidence from EMU countries

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Gómez-Puig, Marta and Sosvilla-Rivero, Simón (2017) Heterogeneity in the debt-growth nexus: Evidence from EMU countries. International Review of Economics and Finance, 51 . pp. 470-486. ISSN 1059-0560

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Official URL: http://dx.doi.org/10.1016/j.iref.2017.07.008



Abstract

The objective of this paper is to examine whether the threshold beyond which a public debt change may have a detrimental effect on economic growth changes across euro area countries during the 1961–2015 period. In contrast with previous studies, we do not use panel estimation techniques, but implement a time-series analysis for each country based on the growth literature. The results suggest that in all the countries but Belgium a debt increase begins to have detrimental effects on growth well before the SGP debt ceiling (a debt ratio of around 40% and 50% in central and peripheral countries, respectively) is reached. So, although austerity policies should be applied in EMU countries – since according to our results debt reduction barely exerts any significant beneficial impact on EMU countries' growth – they should be accompanied by structural reforms that can increase their potential GDP. Moreover, as our results suggest that the harmful impact of a debt change on growth does not occur beyond the same threshold and with the same intensity in all EMU countries, a focus on average ratios and impacts may be unsuitable for defining policies. Specifically, our findings suggest that the pace of fiscal adjustment should be lower in Greece and Spain than in the other countries.


Item Type:Article
Uncontrolled Keywords:Public debt; Economic growth; Heterogeneity; Multiple structural breaks; Euro area; Peripheral EMU countries; Central EMU countries.
Subjects:Social sciences > Economics > Economic development
Social sciences > Economics > Econometrics
Social sciences > Economics > World economy
Social sciences > Economics > Public economy
JEL:C22, F33, H63, O40, O52
ID Code:57228
Deposited On:04 Oct 2019 11:55
Last Modified:07 Oct 2019 07:45

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