No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
The causal relationship between debt and growth in EMU countries
Abstract
New evidence is presented on the possible existence of bi-directional causal relationships between public debt and economic growth in both central and peripheral countries of the European Economic and Monetary Union. We test for heterogeneity in the bi-directional Granger-causality across both time and space during the period between 1980 and 2013. The results suggest evidence of a “diabolic loop” between low economic growth and high public debt levels in Spain after 2009. For Belgium, Greece, Italy and the Netherlands debt has a negative effect over growth from an endogenously determined breakpoint and above a debt threshold ranging from 56% to 103% depending on the country.
Supplementary resource (1)
... Evidence from the existing empirical data points to changes that originated from time and cross-country divergence. In certain investigation, the connection between public debt and economic growth was unidirectional (Afxentiou, 1993;Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Kobayashi, 2015;Woo & Kumar, 2015), whereas, in other studies, the connection was found to be bidirectional (Abbas & Christensen, 2010;Amoateng & Amoako-Adu, 1996;Donayre & Taivan, 2017;Eberhardt & Presbitero, 2015;Ferreira, 2009;Owusu-Nantwi & Erickson, 2016). However, certain investigations discerned no connection between public debt and economic growth (Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Jalles, 2011;Panizza & Presbitero, 2014;Reinhart & Rogoff, 2010a). ...
... In certain investigation, the connection between public debt and economic growth was unidirectional (Afxentiou, 1993;Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Kobayashi, 2015;Woo & Kumar, 2015), whereas, in other studies, the connection was found to be bidirectional (Abbas & Christensen, 2010;Amoateng & Amoako-Adu, 1996;Donayre & Taivan, 2017;Eberhardt & Presbitero, 2015;Ferreira, 2009;Owusu-Nantwi & Erickson, 2016). However, certain investigations discerned no connection between public debt and economic growth (Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Jalles, 2011;Panizza & Presbitero, 2014;Reinhart & Rogoff, 2010a). ...
The impact of Nigeria's public debt on economic growth was investigated in this study.
Additionally, it confirmed the validity of Nigeria's debt burden and crowding-out hypotheses. The
time series data used ranged from 1981 to 2021. For analysis, the Two-Stage Least Squares and
Toda YamamotoCausalitytestswere employed.The findings contradicted the debt overhangeffect
hypothesis by showingthat publicdebthad a positive and significantinfluenceon economic growth.
This proves that Nigeria's public debt has no adverse effects on the economic growth of the nation.
Additionally, debtservice has a detrimental effect on economic growth. This demonstrated that the
crowding-out effect, often known as the crowding-out hypothesis, existed in Nigeria. Thus,
servicing the national debt has a negative impact on Nigeria's economic expansion. The results of
the public debt model, however,showed that trade openness and real gross domestic product had a
favourable effect on public debt. A bidirectional relationship between public debt and economic
growth was revealed by the findings of the causality test. The results also showed a one-way
relationship between debt service and economic growth. As a result, the study implies that the
government can simultaneously pursue its two policy goals of economic growth and public debt.
Furthermore, decisions about debt repayment in Nigeria should be made in a way that promotes
the growth of the economy. Nigeria should also improve institutional performance and boost its
macroeconomic policy in the areas of inflation, foreign direct investment, trade, and exchange rate
... Evidence from the existing empirical data points to changes that originated from time and cross-country divergence. In certain investigation, the connection between public debt and economic growth was unidirectional (Afxentiou, 1993;Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Kobayashi, 2015;Woo & Kumar, 2015), whereas, in other studies, the connection was found to be bidirectional (Abbas & Christensen, 2010;Amoateng & Amoako-Adu, 1996;Donayre & Taivan, 2017;Eberhardt & Presbitero, 2015;Ferreira, 2009;Owusu-Nantwi & Erickson, 2016). However, certain investigations discerned no connection between public debt and economic growth (Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Jalles, 2011;Panizza & Presbitero, 2014;Reinhart & Rogoff, 2010a). ...
... In certain investigation, the connection between public debt and economic growth was unidirectional (Afxentiou, 1993;Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Kobayashi, 2015;Woo & Kumar, 2015), whereas, in other studies, the connection was found to be bidirectional (Abbas & Christensen, 2010;Amoateng & Amoako-Adu, 1996;Donayre & Taivan, 2017;Eberhardt & Presbitero, 2015;Ferreira, 2009;Owusu-Nantwi & Erickson, 2016). However, certain investigations discerned no connection between public debt and economic growth (Donayre & Taivan, 2017;Gomez-Puig & Sosvilla-Rivero, 2015;Jalles, 2011;Panizza & Presbitero, 2014;Reinhart & Rogoff, 2010a). ...
The impact of Nigeria's public debt on economic growth was investigated in this study. Additionally, it confirmed the validity of Nigeria's debt burden and crowding-out hypotheses. The time series data used ranged from 1981 to 2021. For analysis, the Two-Stage Least Squares and Toda Yamamoto Causality tests were employed. The findings contradicted the debt overhang effect hypothesis by showing that public debt had a positive and significant influence on economic growth. This proves that Nigeria's public debt has no adverse effects on the economic growth of the nation. Additionally, debt service has a detrimental effect on economic growth. This demonstrated that the crowding-out effect, often known as the crowding-out hypothesis, existed in Nigeria. Thus, servicing the national debt has a negative impact on Nigeria's economic expansion. The results of the public debt model, however, showed that trade openness and real gross domestic product had a favourable effect on public debt. A bidirectional relationship between public debt and economic growth was revealed by the findings of the causality test. The results also showed a one-way relationship between debt service and economic growth. As a result, the study implies that the government can simultaneously pursue its two policy goals of economic growth and public debt. Furthermore, decisions about debt repayment in Nigeria should be made in a way that promotes the growth of the economy. Nigeria should also improve institutional performance and boost its macroeconomic policy in the areas of inflation, foreign direct investment, trade, and exchange rates.
... However, De Vita et al. (2018) also imply that this result implies a bidirectional causality. Ferreira (2009), Lof and Malinen (2014), Gómez-Puig and Sosvilla-Rivero (2015) and Puente-Ajovín and Sanso-Navarro (2015) also say nothing other than about the basic theory of reverse causality for bidirectional causality. Juergen (2019) investigates the bidirectional causality, but also bases his theoretical explanations for this on de Vita et al. (2018). ...
... There are many studies in the literature that agree on this, for example, Irons and Bivens (2010), Parent (2012), Panizza and Presbitero (2012, b, 2014, O'Brien (2013), Skott and Ryoo (2014), Pescatori et al. (2014), Lof and Malinen (2014), Skott (2015), Donayre and Taivan (2017), Lee et al. (2017), Krugman (2019), and Das and Husseiny (2019). Also, according to Gómez-Puig and Sosvilla-Rivero (2015) and Swamy (2015), there is no strong evidence for a bidirectional causality relationship in Reinhart and Rogoff (2010b)'s results. However, Gómez-Puig and Sosvilla-Rivero (2015) and Swamy (2015) overlook that most of the methods preferred in the studies in the literature do not have any assumptions about this hypothesis. ...
This paper approaches the causality of public debt and economic growth from three perspectives: Historical for the data, theoretical for the relations, and econometrical for the examination. We examine causality for the United States (US), United Kingdom (UK), Sweden (SE), and Japan (JP) over the period starting from 1801 up to 2011, with the nonlinearity of Fourier and Asymmetric approaches. Asymmetric causality results point out that negative shocks in growth increase debt for SE, while negative shocks in debt decrease growth for the US. Fourier causality results show that there is a unidirectional causality for US and SE from growth to debt, while for the UK there is a bi-directional causality, namely reverse causality or hysteria theory. Asymmetric causality results do not confirm that debt decreases growth in any country, while Fourier causality results show reverse causality. This result has important policy implications specifically because economic growth influences the evolution of public debt with structural breaks.
... On the other hand, by increasing debt servicing costs, it exposes countries to financial risks. A strong expansion of the debt can be associated with a significant economic contraction that can last for years. 2 Whatever the economic situation (expansion or recession), we have noted that for some European OECD countries, the pace of growth is not the same as for others due to their high indebtedness ratios and lack of energy resources, 3 where the pace of GDP growth is affected by energy supply for some countries or by their debt policies for others. Given the financial and economic downturn, the group of European OECD members, especially the ones with weak economies-the so-called GIIPS countries (Greece, Ireland, Italy, Portugal, and Spain)-represent a valuable case for testing the dynamics and relationships of persistently high levels of public deficits and external imbalances. ...
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
... This transformation requires a sustainable method of financing its ambitions. This is because the causal relationship between sovereign debt variables and economic growth has direct policy implications, particularly on tax and investment choices -and consequently on economic growth (see Gómez-Puig & Sosvilla-Rivero, 2015. Therefore, it is important for policymakers to carefully analyze the relationship between debt and economic growth and take measures to manage the debt in a sustainable manner. ...
This study investigates the dynamic effects of public debt on economic growth in Ethiopia using annual data from 1980 to 2021. The results from the Autoregressive Distributed Lag (ARDL) modeling approach reveal that while public debt boosts investment and enhances growth in the short term, it hinders long-term growth. Additionally, debt servicing negatively impacts growth in both the short and long term by diverting vital resources from investment. Thus, public debt acts as a two-edged sword for Ethiopia’s economic growth. On one side, it finances infrastructure and other growth-stimulating projects; on the other, high debt levels can impede growth. To mitigate the adverse impacts of public debt, Ethiopia should implement prudent fiscal discipline, mobilize domestic revenue, manage debt efficiently, address its structural trade deficit, and prioritize needs to prevent misuse and corruption. This approach should also prioritize social spending and public investment while strategically transitioning from debt dependence.
... Panizza and Presbitero (2013) shed light on the complexity of this relationship. Empirical assessments have revealed various scenarios, ranging from no causality to both unidirectional and bidirectional causality (Ferreira 2009;Gómez-Puig and Sosvilla-Rivero 2015;Panizza and Presbitero 2014). Additionally, research suggests the potential for a nonlinear relationship, wherein the dynamics alter beyond a certain threshold (Alexander et al. 2017;Baum, Checherita-Westphal, and Rother 2013;Checherita-Westphal and Rother 2012;Égert 2015;Markus and Presbitero 2015;Pattillo, Poirson, and Antonio Ricci 2011). ...
This article examines the dynamics of general government debt across 27 transition and post-transition countries spanning from 1996 to 2019. We devise and assess a theoretical model incorporating key determinants shaping the trajectory of public debt. Our evaluation employs panel data models. The findings underscore inflation, GDP growth, and nominal exchange rate as primary influencers of public debt. However, the significance of the exchange rate diminishes, displaying negative signs, when excluding post-transition euro area countries from analysis.
... Researchers who examined different periods for developing countries interestingly reached conclusions about unidirectional causality from PD to EG. In the other part of the literature, causality studies conducted at the panel level reveal results that are far from consent (Arčabić et al. 2018;Butts 2009;Ferreira 2009Ferreira , 2016Gómez-Puig and Sosvilla-Rivero 2015;Jacobs et al. 2020;Jayaraman and Lau 2009;Panizza and Presbitero 2014;Puente-Ajovin and Sanso-Navarro 2015). In this context, it is possible to list studies whose authors applied linear and nonlinear techniques (De Vita et al. 2018;Di Sanzo and Bella 2015) and asymmetric methods (Kempa and Khan 2016;Ozmen and Mutascu 2023) to the causal relationship. ...
Investigators of the public debt-economic growth nexus have yet to fully address the crucial issue of determining the direction of causality. There is an implicit assumption—or perception—that the causal relationship is mostly from public debt to economic growth. Beyond this, causal relationships may vary according to the presence of structural breaks as well as different frequency characteristics. The focus of this study is to address these issues. In this context, we comparatively investigate how structural changes and frequency characteristics affect the public debt-economic growth nexus using historical data covering the period 1870–2020 for G7 countries. Methodologically, we use Fourier Toda-Yamamoto and frequency-domain causality techniques from time and frequency-based approaches, respectively. Consistent with our expectations, we show that in the link between public debt and economic growth, they differ from or in some cases confirm each other based on the time and frequency-domain approaches. According to both approaches, in Italy and Japan, the feedback effect is valid, implying a mutual interaction between public debt and economic growth. Also, we find that this relationship is permanent. Similarly, we conclude that there is no causal relationship for France according to both approaches. For the remaining countries, however, we provide diverse evidence on both the direction of causality and the temporary/permanent nature of the causal relationship. The results on temporary or permanent causality at different frequencies offer policymakers and researchers detailed insights into an obscure aspect of the existing literature.
... Extensive research has been conducted to examine the correlation between government expenditure and economic growth. The findings of these studies suggest that there exists an inverse relationship between the two variables when the debt threshold surpasses a certain level (Azam & Khan, 2020;Eberhardt & Presbitero, 2015;Gómez-Puig & Sosvilla-Rivero, 2015;Mitze & Matz, 2015;Woo & Kumar, 2015). This perspective posits that government debt exerts a detrimental influence on economic growth through its impact on private savings and investments, total factor productivity, and capital accumulation. ...
Purpose: Economic growth is widely regarded as a crucial indicator of economic advancement within a nation, as it has significant implications for the provision of state benefits, the improvement of living standards, and the generation of employment opportunities. The present study employed a time series analysis spanning from 1983 to 2018, focusing on Ghana, in order to comprehensively examine the diverse impact of both aggregate and disaggregated government expenditure and debt on the country's economic growth. Methodology: The study conducted initial examinations, including unit root tests, cointegration tests, and correlation matrices, to determine the statistical reliability and validity of the data series for the research. The long-run parameters were estimated using the two-stage least square regression method, the autoregressive distributed lag method, and the threshold regression method. Findings: Based on our research, it has been determined that government expenditure exerts a positive and statistically significant influence on overall economic growth. However, when examining the disaggregated effects, it becomes evident that consumption expenditure has a positive and significant impact on economic growth, whereas capital expenditure has a negative effect on economic growth. Unique Contribution to Theory, Practice and Policy (Recommendations): In relation to the prevailing economic conditions characterised by periods of prosperity or recession, it is evident that the government should prioritise its attention towards external debt rather than domestic debt during times of economic expansion. Moreover, during periods of economic downturn, it is imperative for the government to prioritise foreign direct investment as a means of financing its budget, rather than relying on debt
... To examine the causal relationship between public debt and real economic growth, the literature investigated a sample of 20 OECD countries in 40 years. The authors found two-way causality which depends on the specific country, hence it cannot be inferred that country's higher public debt always leads to lower economic growth (Donayre and Taivan, 2017;Gómez-Puig and Sosvilla-Rivero, 2015;Dreger and Reimers, 2013). Other studies have studied public debt through countries' optimal tax-to-GDP ratio thresholds to determine whether exceeding the optimal threshold of tax-to-GDP rate reduces GDP growth, and compared the optimal revenue tax thresholds of countries with appropriate solutions to identify issues that managers and investors need to consider in order to have synchronous solutions between macro policies, tax policies, investment policies, in addition, the authors studied economic growth in developed and developing countries and used an automatic vector regression (VAR) model to explore economic growth (Dinh, 2022;Al-Taie et al., 2022). ...
This study investigates the relationship between countries' economic growth and government debt to explore whether exceeding government debt causes reduced GDP growth and compares countries' government debts to obtain a matching solution. This study Applies the VAR model, unit root test, and cointegration test to explore the impact of government debt on GDP growth, collecting data from 2000 to 2020 in Vietnam, the USA, China, and South Africa to estimate the government debt level and the relationship between countries' government debt and GDP growth. Government debt and GDP growth have a close negative relationship: South Africa, America, China, and Vietnam correspond to-71%, -28.6%, -85.2%, -34%, and the relationship between Vietnam's public debt with America's, respectively, and the relationship between Vietnam’s public debt with America’s, South Africa’s public debt, and China’s public debt is94.5%, 72.1%, and 88.4%, respectively, the relationship between America's public debt and China's public debt, South Africa's public debt is 90.1% and 78%, respectively, and the relationship between China's public debt and South Africa's public debt is 91.1%. The results support fiscal policy appropriately and identify issues for managers, investors, and readers to consider: have a comprehensive solution among macroeconomic policies, public debt policy, investment policy, and other policies to control and balance the relationship between public debt and GDP growth and have appropriate policies to regulate funds to stimulate investment over the long term.
... There are numerous studies that have analyzed the effects of economic growth on the public debt of countries such as (Pegkas, Staikouras & Tsamadias, 2020;Lim, 2019;De Vita, Trachanas & Luo, 2018;Gomez & Rivero, 2017;Gomez & Rivero, 2015;Bell, Johnston & Jones, 2015;Iovin & Navarro, 2015;Law, Ng, Kutan & Law, 2021). All studies represent a negative bidirectional relationship between economic growth and public debt. ...
Recently, when analyzing the performance of trading companies, various multi-criteria decision-making
methods are increasingly used individually or integrated. In this way, because several criteria are used integrally at the
same time, it is better to get a realistic idea of the achieved performance compared to classical methods. Based on that,
this paper analyzes the performance of trading companies in Serbia based on the DIBR and WASPAS methods. The
results of the WASPAS method show that DELHAIZE SERBIA DOO BELGRADE is in first place. Next: LIDL
SERBIA KD NOVA PAZOVA, MERCATOR-S DOO NOVI SAD, NELT CO. DOO BELGRADE, MOL SERBIA
DOO BELGRADE, PHOENIX PHARMA DOO BELGRADE, MERCATA VT DOO NOVI SAD, OMV SERBIA
DOO BELGRADE, LUKOIL SERBIA DOO BELGRADE and KNEZ PETROL DOO ZEMUN. Foreign retail chains
are better positioned than domestic ones. They apply new business methods (multichannel sales - store and electronic,
private label, sale of organic products, etc.) and the degree of digitization of the entire business is greater. Overall, under
the positive influence of numerous macro and micro factors (favorable economic climate, efficient management of
human resources, assets, capital, sales and profit, digitization of the entire business, etc.), the performance of trading
companies in Serbia has improved.
Keywords : performance, efficiency, factors, DIBR and WASPAS method, Serbian trade
... There are numerous studies that have analyzed the effects of economic growth on the public debt of countries such as (Pegkas, Staikouras & Tsamadias, 2020;Lim, 2019;De Vita, Trachanas & Luo, 2018;Gomez & Rivero, 2017;Gomez & Rivero, 2015;Bell, Johnston & Jones, 2015;Iovin & Navarro, 2015;Law, Ng, Kutan & Law, 2021). All studies represent a negative bidirectional relationship between economic growth and public debt. ...
The country's public debt is one of the main macroeconomic indicators of a country's stable economy. The authors in this study try to explain the diversity of the effects of many macroeconomic indicators on the public debt of developed and developing countries. The sample of the study includes 12 countries, of which the countries are divided into two groups. The first group includes developed countries while the second group includes developing countries. The aim of the study is to analyze and compare the effects of macroeconomic factors on the public debt of countries. The authors use the statistical software E-views where at the beginning of the study they analyze the descriptive data of developed and developing countries. After that, a series of diagnostic tests are performed, such as unit root tests and the derivation of the correlation matrix in order to reject the hypotheses of non-stationarity and collinearity. At the end of the research, the authors use the POLS method and the Fixed effect model to interpret the effects of independent variables on the dependent variable of public debt. The study covers the period from 1998 to 2023 and includes projections for the year 2024. An additional goal of the study is to observe and analyze the movement of macroeconomic factors in crisis and recessionary periods of the world economy. These findings will be useful to regulators who are developing, amending, or implementing public debt laws, policies, and regulations.
... Negative interaction between debt and growth in a non-linear relationship over a specific limit of debt (the "threshold hypothesis") has been characterised by the first wave of literature as a "stylized fact". Some researchers (Panizza and Presbitero, 2014;Eberhardt and Presbitero, 2015;Gomez-Puig and Sosvilla-Rivero, 2015) identify serious technical challenges when validating the methodology. Among others, they revealed cross-country heterogeneity, parameter instability, and endogeneity problems. ...
This study investigates the relationship between national terms of trade (price
of export relative to import) and commodity terms of trade (price of primary
commodity relative to manufactured goods) using data on forty-eight (48)
Sub-
Sahara Africa (SSA) countries. Data sourced from the International Monetary
Fund (IMF) database and World Bank (WB) Development Indicator (WDI) was
estimated via panel autoregressive distributed lag (panel-ARDL). The result provides
evidence of a stable positive long-run relationship between commodity terms of
trade and terms of trade of individual Sub-Sahara Africa countries. This implies
that a decline in the relative price of primary commodity will result in a fall in
aggregate terms of trade in the long run. The study submitted that commodity
terms of trade is a useful indicator of the movement in the aggregate terms of trade
of countries in Sub-Sahara Africa and the validity of Prebisch-Singer hypothesis
(PSH). We recommend a big-push investment in the production and export of
primary commodity since the trend in the terms of trade of primary commodity
reflects the trend in the terms of trade of manufactured goods.
... One has to keep in mind that causal connections between sub-indices might also work both ways. To explore the bidirectional causal relationships, future research could use other techniques of data analysis, such as the Granger causality test on the vector autoregressive model and the error correction model (e.g., Gomez-Puig and Sosvilla-Rivero, 2015;King and Du, 2018). ...
We apply a four-stage methodology (i.e., cluster analysis, data mining, partial least square path modeling, and importance-performance analysis) to identify the critical paths to multi-dimensional prosperity of nations. Using the Legatum Prosperity Index across 142 countries as a proxy for prosperity, we find strong evidence of the positive causal mechanisms among dimensions of prosperity. This implies that individual dimensions of prosperity should not be weighted equally in designing policies that support prosperity of nations. In line with human capital theory, we find that education and the pupil to teacher ratio are the key policy drivers of prosperity enhancement.
... For detailed views about external debt and growth nexus, see (Panizza & Presbitero, 2014;Khursheed & Siddiqui 2016;Chaudhry et al., 2017;Vita et al., 2018;Joy & Panda, 2019;Patricia & Ugwuanyi, 2019). Several econometric techniques are applied on different datasets and find the existence of causality as well as the direction of causality based on the assumption of crosssectional independence (see, Gomez-Puig & Sosvilla-Rivero, 2015;Favour et al., 2017;Qureshi & Liaqat, 2020;Akdugan & Yıldız, 2020;Hameed & Quddus, 2020). The findings of the above studies are diversified and contradicted regarding the impact, the existence of causality, and the direction of the causality between external debt's categories and economic growth. ...
This study investigates the causal relationship between public and private external debt and economic growth in developing countries. Our model includes 18 selected Asian developing and transition economies from 1995 thru 2019. We employ the dynamic heterogeneous panel data methods, pooled mean group (PMG), robust cross-sectional augmented autoregressive distributed lag (CS-ARDL), and pairwise panel causality test. The results of PMG and CS-ARDL show the existence of causality between external debt and economic growth both in the short-run and long-run. The pairwise Granger causality test found the bidirectional causal relationship runs from total external debt, public external debt, and private external debt to economic growth and economic growth to external debt. The results showed first the existence of causality in the short-run and long-run between external debt and economic growth and the second, bi-directional causality that runs from external debt to economic growth and economic growth to external debt. Both the dynamic models and robust estimator found the same inferences about the impact of main variables on economic growth in Asian developing and transition economies. The findings of this study suggest to assure debt management, investment in productive sectors, increase domestic savings, decrease external dependency, and focus on international trade.
... The empirical results suggest a positive and statistically significannt impact of debt on GDP growth. Puig and Rivero(2015) they tested the relationship on debt and growth with Granger causality analysis. In the study EMU countries (Greece, Ireland, Italy, Portugal, Spain, Austria, Belgium, Finland, France, Germany) data between 1980 and 2013 were used. ...
For developing countries, sustainable economic growth is one of the key macroeconomic objective. However not every country has enough capital to support GDP growth. Even that the country hasn’t enough national capital, the government can borrow some capital as external debt to support GDP growth. The aim of this study is to investigate the relationship between economic growth and external debt fort he Brazilian economy. In this study, the effect of various variables such as the ratio of external debt to GDP, ratio of debt service stock to GDP, the ratio of national expenditure to GDP, real Exchange rate, trade openness were investigated in the long run and short run. Accordingly, the effect of external debt on economic growth was determined with the help of ARDL Bound Test. The data used in the study covers the period of 1970-2015. Acording to the findings, a long- term relationship was found between external debt and growth rate in Brazil. It was concluded that external debt had a negative effect on the economic growth. According to this result, it is thought that developing countries external borrowing, providing sustainable debt and converting debt into investments will increase the GDP.
The current research examines the impact of different macroeconomic indicators on Djibouti's external debt from 1990 to 2022 using the Autoregressive Distributed Lag (ARDL) model. The empirical model provides evidence that economic growth, trade, and government expenditure have a positive and significant impact on external debt. Moreover, the findings uncovered a positive relationship between Djibouti's national savings and external debt. Interestingly, FDI inflows and population growth showcased insignificant impacts on external debt during the long run. This can be explained by the lack of a business operating environment that attracts FDI and a limited number of consuming customers due to the modest percentage of the Djiboutian population. Consequently, these findings highlight the importance of sustained economic growth, trade efficiency, and fiscal prudence in managing and potentially reducing external debt. Additionally, the insight into the relationship between national savings and external debt provides a foundation for further exploration into Djibouti's borrowing and behaviors.
In the last two and a half decades, the volatility of agricultural commodity prices has become a significant concern for governments, policymakers, farmers, traders, and consumers. This issue gained prominence particularly during the episodic rises in prices from 2007 to 2011, and has been exacerbated by the Covid-19 pandemic and the Russia-Ukraine war. In this volatile global economy, Ghana has relied on imports of livestock and meat products, such as beef and mutton, to supplement its domestic supply. This dependence on foreign imports implies a trade flow between Ghana's domestic meat markets and foreign markets, with the potential for volatility transmission across these markets. To investigate this issue, we employed multivariate GARCH models (DCC & CCC) to assess the nature of volatility transmission between foreign meat markets and domestic meat markets in Ghana. Additionally, we examined the influence of macroeconomic indicators such as crude oil price returns and exchange rates on the volatility of meat returns. Our study utilized monthly data from five countries that traded beef and mutton with Ghana from 2016 to 2020. The findings indicate that the domestic and foreign meat markets are interdependent, particularly in the beef markets, where volatility in foreign markets is transmitted to Ghana's domestic market. The study further reveals that, the instability of key macroeconomic variables, specifically crude oil price returns and exchange rates, significantly impacts the volatility transmission of meat price returns in Ghana. Based on these findings, we recommend that the government of Ghana adopt a coordinated approach to market regulation in the meat sector to help stabilize prices and reduce volatility. This could involve setting standards for quality, hygiene, and pricing among meat importers and traders, as well as monitoring imports to ensure that only certified and licensed traders are involved in the import and trade of foreign meat products. Such measures would help prevent market distortions and contribute to a more stable meat market in Ghana.
In this paper, we explore the causal relationships between energy, debt, and growth for a selection of nine OECD European countries. This examination enables us to draw lessons and deduce implications regarding the interconnections between these variables, helping us determine whether they evolve independently, or are mutually related. To conduct this analysis, we utilize annual data and employ econometric techniques, including vector-autoregressive (VAR) models, as well as Granger and Toda-Yamamoto causality tests, applied to specific countries within the group. Our key findings provide significant insights, enabling us to categorize the countries by their levels of indebtedness and energy independence. The inclusion of energy supply results in a more coherent segmentation of countries, consistent with descriptions in the literature. This classification provides a clearer understanding of the economic and energy dynamics within these nations and helps inform policy decisions aimed at managing debt levels and enhancing energy security.
Penelitian ini bertujuan mengidentifikasi hubungan kausalitas dari utang luar negeri dan pertumbuhan ekonomi serta mengidentifikasi bagaimana arah dan pengaruh antara utang luar negri dan pertumbuhan ekonomi di Indonesia baik dalam jangka pendek maupun dalam jangka panjang. Dengan menggunakan metode uji kausalitas granger dan estimasi model error correction model dengan periode waktu 1990-2019 , penelitian ini memberikan hasil bahwa terdapat hubungan kausalitas satu arah antara utang luar negeri dengan pertumbuhan ekonomi di Indonesia. Utang luar negeri berpengaruh terhadap pertumbuhan ekonomi baik dalam jangka pendek maupun dalam jangka panjang. Ini membuktikan bahwa Hipotesis Richardian Equivalence yang meyatakan bahwa utang luar negeri tidak berpengaruh terhadap pertumbuhan ekonomi tidak terbukti terjadi di Indonesia.
This article estimates the impact of the level of regional public debt on the rate of regional economic growth in the context of socio-economic development of Russian regions. The results obtained are important for determining the optimal level of regional public debt in order to increase the efficiency of the Russian regional budget policy. The level of regional public debt is understood in this study as the ratio of regional public debt to its GRP. Considering the heterogeneity of regions in the modeling process, the subjects were clustered by the level of socio-economic development using the k-means algorithm. Further, the results of clustering were used in econometric models to identify differences in the level of regional public debt impact on the economic growth of regions depending on the level of their socio-economic development. Using panel data models for the subjects of the Russian Federation, the negative impact of the public debt level on regional economic growth rates was revealed for regions with a low and medium levels of socio-economic development. By implementing the Hansen procedure for the subjects of these clusters, the threshold level of regional public debt was found. It is equal to 2.36% of GRP, above which the neutral impact of public debt on economic growth is replaced by a negative one. For regions with a high level of socio-economic development it was found that changes in the level of public debt are neutral in relation to regional economic growth. These results allowed us to formulate recommendations for regional budget policy.
This article aims to verify the development prospects of the Pan‑European Personal Pension Product (PEPP) in the European Union (EU). It focuses on the relationship between the quality of domestic public pension schemes and household savings for old age in the EU member and candidate countries. The study was conducted in two stages. The first stage examined the interrelationship between public pension schemes and household savings based on Pearson’s correlation coefficients. In the second stage, sub‑samples of countries with high and low‑quality public pension schemes were identified using hierarchical cluster analysis. The results showed significant links between households’ obligatory and voluntary saving for retirement in both samples. However, the study recognised the internal diversity of countries in terms of households’ preferences for the types of financial assets. Based on these findings, conclusions about the development potential of PEPP are drawn. The best prospects are identified for Croatia, Cyprus, France, Greece, Hungary, Poland, Portugal, Romania, Slovenia, Spain, and Turkey. In most of these countries (except for France, Hungary, Romania, and Spain), the PEPP could serve as an alternative to household liquid assets. However, in Croatia, France and Italy, it was recognised as competing with existing domestic retirement and life insurance products, which may negatively impact its development. This is the first comprehensive study of the prospects of PEPP in a large group of countries. The results provide socially essential knowledge as they address the role of private savings in supplementing households’ future income from public pension schemes, considering the availability of a new product such as PEPP.
This study examines the threshold effect of institutional quality on the sovereign debt-macroeconomic stability nexus using panel data from 133 countries covering the period from 2002 to 2020. We measure macroeconomic stability using principal component analysis of budget deficit, annual inflation rate, official exchange rate, real interest rate, and unemployment rate. The dynamic GMM result shows that institutional quality has a positive effect on macroeconomic stability, while government debt has a negative effect. However, the interaction between institutional quality and government debt changes the direction of the effect of debt on macroeconomic stability. Moreover, in dynamic panel threshold regression, we document the evidence of the threshold effect of institutional quality on sovereign debt-macroeconomic stability nexus and suggest that before (after) the threshold level of institutional quality, there is a negative (positive) impact of debt on macroeconomic stability. Our result suggest that better institutions can use debt more efficiently and productively to enhance economic performance. The findings of this study have significant implications for policymakers in formulating policies to promote macroeconomic stability.
One of the tools of economic policy of any country is efficient public debt management, which influences and determines the dynamics of key macroeconomic indicators. The study aims to assess how public debt management affects Ukraine’s macroeconomic development. The analyzed period includes data of 2015–2021. Econometric modeling is used to establish the existence of causal relationships between the dynamics of public debt and changes in key macroeconomic indicators using the Granger causality test and VAR (Vector Autoregression) model. The obtained results demonstrate that during the study period, the strongest links existed between the public debt and GDP, debt servicing and Ukraine’s total state budget expenditures, public debt and consumer price index, real effective exchange rate index of the hryvnia to the US dollar, and political stability index. At the same time, the calculations proved that public debt does not have a significant impact on foreign direct investment and the level of imports of goods and services. The proposed model allows for forecasts for future periods and can be used in developing public debt management policy.
This study attempts to explore the impact of external debt (Reserves), and political stability & absence of violence/terrorism (PS&AVT) on the current financial crisis in Sri Lanka. Using data from 1996 to 2022 obtained from the World Bank (WB) and the Central Bank of Sri Lanka (CBSL), a regression analysis is conducted, with a composite variable named "CRISIS," which accounts for interest rate, inflation, currency devaluation adjusted to GDP growth, as the dependent variable. The findings indicate that, collectively, these predictors significantly contribute to explaining the variance in the financial crisis, although their impact is relatively minor. While the direct influence of PS&AVT on the financial crisis is not statistically significant, it indirectly affects the crisis through its considerable impact on debt and reserves. Granger causality tests showed predictive value for Reserve in relation to CRISIS, but the reverse relationship was not significant. Regression analysis using the error term and scatter plots supports the absence of endogeneity issues in the model. These findings suggest that while external debt and foreign reserves are more directly related to financial crises, political stability and the absence of violence/terrorism can influence the crisis indirectly through their effects on debt accumulation and reserve levels. This study represents a pioneering effort in investigating the impact of external debt, foreign reserves, and political stability on the financial crises in Sri Lanka. By utilizing a comprehensive dataset and applying a regression analysis, it sheds light on the complex interactions between these variables and their influence on the country’s financial stability.
This study examines the relationship between debt, foreign aid, and economic growth in three Pacific Island economies; namely Fiji, Papua New Guinea (PNG), and the Solomon Islands. Small and vulnerable island economies are dependent on foreign aid and debt for economic development. However, empirical studies on how debt and aid impact economic growth in small and fragile island economies are scarce, and this study aims to fill this gap. We use the ARDL approach and estimate the debt-growth and aid-growth relationship for each of the three economies. Our results indicate that debt reduces economic growth in both the short-run and the long-run in all three economies. Moreover, while all the three economies are also heavily dependent on foreign aid, we do not find any growth enhancing effect of aid. The findings suggest that although government borrowing and foreign aid are necessary for small island states given their lack of domestic capital, it is important that these resources be utilized efficiently for growth benefits to be realized.
In this paper, continuous wavelet decompositions regarding the notions of coherence and phase are used to analyze the time-frequency dynamics of the existing relationships between energy supply and economic growth for a group of European countries. The objective is to identify both the intensity and the direction of the relationship over time and across frequencies. We also study the existence of a debt channel implying an indirect relationship between energy and growth. Our results show the complexity of the energy supply-growth relationship composed by direct effect at the short run and indirect effects through debt channel at the mid and long run. The countries with the highest debt/GDP ratio are more subject to such direct and indirect effects than others where only short run direct effect is noted.
Cet article aborde la problématique des déficits budgétaires dans le contexte des Pays de la CEDEAO. Il propose une contribution au débat à la fois théorique et empirique sur la portée de l’instrument budgétaire dans un cadre d’intégration appelé à se renforcer. Il s’interroge sur la soutenabilité des déficits budgétaires à l’aide d’approches empiriques éprouvées dans la littérature correspondante. Les résultats indiquent que les niveaux de déficits apparaissent non soutenables. L’approche empirique convoquée pour examiner les déterminants des déficits, contrôle les effets spécifiques aux pays et montre que la dette et les investissements nationaux ont un impact très fort sur leur formation. L’effet contraire est observé sur la balance des paiements et l’aide publique au développement. Autant de résultats qui renseignent sur les défis importants associés aux normes de convergence économique de la zone. Ces résultats sont un cas réel de la politique budgétaire dans les pays en développement.
In this chapter, the relationship between public debt and economic growth is examined for OECD countries. In order to determine this relationship, the data between 2002 and 2016 is analyzed using panel threshold regression methods. The findings of the study suggest that the relationship between public debt and economic growth is linear. The public debt threshold is estimated at 99.75% for OECD countries but it is statistically insignificant. While the public debt to GDP ratio is both below and above this threshold, the effect of public debt on economic growth is negative and statistically significant. There is no evidence of the existence of a non-linear relationship between public debt and economic growth. These findings are expected to guide policymakers in the implementation of fiscal policies.
Quality institutions augment economic sustainability by ensuring domestic resource optimization with equitable development principles. Therefore, ensuring this equitable development and quality institutions is required. This study assessed the effects of government debt, uncertainty of economic policies, and government spending on institutional quality, as measured by governmental effectiveness in BRIC (Brazil, Russia, India, and China) nations from1990–2020. This study applied several econometrical techniques for empirical nexus assessment, including Augmented ARDL, nonlinear Autoregressive Distributed Lagged (ARDL), and Fourier Toda-Yamamoto causality tests. This study documented long-run cointegration in both symmetry and asymmetric assessments. In the long run, both government debt and uncertain economic policies were significantly negatively associated with institutional quality, while government spending and institutional quality were positively associated. Furthermore, the results of asymmetric ARDL revealed both long- and short-run asymmetric relationships between institutional quality and government debt, EPU, and government spending. The directional causality test documented bidirectional causality between debt and institutional quality in all nations, whereas mixed causalities were detected for uncertain economic policy, institutional quality, and government spending. Regarding policy, the results of this study suggested that economic stability was indispensable for efficient institutional quality in BRIC nations.
Neste estudo fornecemos novas evidências sobre a relação entre a dívida pública e o crescimento econômico no Brasil. Foram aplicados testes de causalidade de Granger, em análises multivariadas e bivariadas usando Vetor de Correção de Erros (VEC) e modelos Autorregressivos de Defasagens Distribuídas (ARDL). Utilizaram-se dados mensais entre janeiro de 1998 a novembro de 2019. Considerou-se a interação entre outras variáveis como juros, inflação, câmbio, Índice de Emerging Market Bond Index Plus (Embi +) e superávit primário. As conclusões são: Dívida e crescimento do PIB têm uma relação de causalidade de Granger bidirecional. A dívida pode melhorar o crescimento no curto prazo e se tornar prejudicial no longo prazo. A taxa de crescimento do PIB sempre reduz a dívida, tanto no curto quanto no longo prazo. A dinâmica entre dívida e crescimento no longo prazo é influenciada pela interação com a taxa de inflação, a taxa de câmbio e Embi+.
This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members? growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals.
In this paper, we use simple accounting schemes and counterfactual experiments, to compare the sources of changes in the public debt to GDP ratio across countries of the European Periphery (Greece, Ireland, Italy, Portugal and Spain), the European Core (Germany and France) and the other G7 countries (Canada, Japan, the United Kingdom and the United States), in two periods—2000–2007 and 2008–2015. In general, Debt‐to‐GDP ratio rose in all countries in the latter period. But the effects of total or primary fiscal deficits, inflation and real growth on the respective Debt‐to‐GDP ratio changes were different across countries in both periods. In the European Core, Ireland and the Anglo‐Saxon countries, successful countercyclical fiscal policies, tended to lower Debt‐to‐GDP ratio. However, in the other European Periphery countries and Japan, unsuccessful countercyclical policies, had the opposite effect. Since in the Euro Area (EA), monetary policy is common and fiscal policies were restricted by rules, this development suggests that differences in shock propagation mechanisms were important drivers of the observed differences in the behaviour of Debt‐to‐GDP ratio between the European Core and the EA Periphery, except Ireland. An implication of this result is that the recently announced EU transfers to the EA Periphery tied up to incentives to improve economic efficiency, seem to be the right policies to ameliorate the effects of the recession brought about by the various social distancing measures to fight the COVID‐19 pandemic, without increasing the Debt‐to‐GDP ratios of these countries.
This paper examines government debt’s effect on economic growth on a sample of 16 countries from Central and Southeast Europe for the period 2009–2018 period. We develop a non-linear dynamic panel-regression model. The findings point out to concavity of the growth function with respect to government debt. The estimates from the baseline model determine the debt threshold at the level of 77.3% of GDP, while the debt threshold ranges from 69.4 to 74.1% of GDP when the primary and overall budget balances are included as covariates. The GMM estimates that we make to deal with potential endogeneity determine the debt threshold at the level of 78.9% of GDP when there are no covariates, while the debt threshold ranges from 75.8 to 80.7% of GDP when the gross fixed capital formation and employment are added as covariates.
Economic growth of a country carries its image in international markets and public debt forms part of its country’s economic activity. Economies need funds for economic development and public borrowings become necessary to achieved it. While the developed economies are self-sufficient in terms of innovation and technological advancement, the smaller and developing economies have to make up their value addition and build up their competitive advantage. The study seeks to determine relationship between public debt and economic growth and to see if any policy changes can combat crisis and achieve economic progress. The study is premised on the understanding that many countries have been facing issues with external debt. Therefore, the study constructs a framework for rationalization of impact of government’s external debt on economic growth of select countries, Brazil, Russia, India, China and South Africa (BRICS). Panel data analysis are conducted to provide a framework to check if there is any relationship between government’s external debt and economic growth. It would be a useful exercise to find out the impact of former on the latter and the extent of the effect based on select factors.
Keywords: External Debt, Debt Service and Economic Growth, Panel Data Analysis, Inflation.
This paper considers how the choice of a unit of account affects the formation of an optimal currency area (OCA). First, we show that forming a currency union internalizes the exchange rate risk and leads to smoothing of consumption levels. However, changing the unit of account of the inherited sovereign debt to a common currency may increase a country’s debt burden if a debtor country is more likely to face a trade deficit within the union. Therefore, the OCA is determined by this trade-off and the debtor country may be better off choosing not to enter the currency union when it faces a high inherited sovereign debt.
This paper aims to outline the stability conditions and the determinants of the public debt-to-GDP ratio within a theoretical framework representing the main features of a monetary economy of production. To this end, we first derive such conditions within a Stock-Flow Consistent model of a dynamic version of the traditional income-expenditure scheme with endogenous public debt service and only fiat money. Secondly, we extend the model to include investments and bank loans, thus considering both fiat and private money creation. Thereby, we develop an analytically solvable SFC model based on the Supermultiplier approach. Our main findings outline that:
i) The steady-state value of the public debt-to-GDP ratio is determined by the saving rate, the growth rate of primary public spending, the tax rate, the capital intensity of the production process and the interest rate. Given these values, there exists a “natural” level of the public debt-to-GDP ratio towards which the system converges in the long-run. This result calls into question the idea of imposing exogenously given thresholds for targeting budgetary rules independently from the very specific features of each economic system;
ii) The necessary condition for the stability of the public debt-to-GDP ratio is the absence of fiscal rules jointly to no full-hoarding of income from interests accrued on public bonds. It becomes sufficient when one of the following is fulfilled: the growth rate of primary public expenditure or the interest rate or the propensity to consume out-of-wealth is higher than zero.
Finally, we highlight that the only fiscal manoeuvres that Government has at its disposal to lower the ratio consists of a permanent expansion in the growth rate of public spending or an increase in the tax rate.
Purpose
The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy.
Design/methodology/approach
Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate.
Findings
This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel.
Research limitations/implications
The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets.
Practical implications
The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia.
Originality/value
To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.
Which variables have supported growth in the euro area over the last 30 years? Answering is challenging due to dimensionality problems caused by a large set of potential determinants, limited data availability, and the prospect of non-stationarity of some variables. We propose an atheoretical framework starting with a set of 35 real, financial, monetary, and institutional variables for nine of the initial euro area countries covering the period between 1990Q1 and 2019Q4. Using the Weighted-Average Least Squares method, we gather clues about which variables to select. We quantify the impact of various determinants of growth in the short and long runs. Our main findings are that institutional reforms, competitiveness, monetary policy and a decrease in systemic risk play a relevant role for long-run growth in the euro area. Surprisingly, the fiscal deficit is not an important factor, and neither is credit to households. Lower debt to GDP ratios are beneficial in the short run. Credit to firms has been an important factor for growth in core countries and an increase in global GDP spillovers positively to the euro area growth in a longer horizon.
This study investigates the relationship between external borrowing and economic growth in the Commonwealth Independent States during the period 1995–2018. Autoregressive distributed lag (ARDL) model is employed to determine the co-integration relationship among the series and then vector error correction model (VECM) is used to analyse the causality between external debt and income. The obtained results suggest that there is a negative long-term unidirectional causal relationship running from external debt to GDP presenting a strong evidence of existence of debt overhang hypothesis. The possible reasons for this unidirectional causal relationship can be explained by poor management of provided financial resources and incomplete governance in economic transition process along with structural rigidities and immature institutions in these countries which, in the long term, resulted in insufficient capital charged to service external debt. The policymakers in these post-Soviet countries should not use foreign loans to capitalise the deficits in the economies; instead, they should be more determined in employing these funds in the areas that will create national value-added production and, thus, future income.
JEL Classification: C10, F34, H63
Purpose
Considering the continuous rise in the public debt stock of developing countries (particularly Ghana) with the unstable economic growth rate for the past decades and the recent borrowing because of the impact of COVID 19, this paper aims to examine the causal relationships between public debt and economic growth over time.
Design/methodology/approach
The paper uses a dynamic multivariate autoregressive-distributed lag (ARDL)-based Granger-causality model to test the causal relationships between public debt and economic growth [gross domestic product (GDP)]. Annual time-series data that spanned 1978–2018 were sourced from the World Bank Development Indicator database and the IMF fiscal Affairs Department Database and WEO.
Findings
The results reveal that public debt has no causal relationship with GDP in the short-run but there is unidirectional Granger causality running from public debt to GDP in the long run. Again, investment spending has a negative bi-directional causal relationship with GDP in the short-run but they have a positive bi-directional causal relationship in the long run. Conversely, no short-run causal relationship exists between government consumption expenditure and GDP but long-run Granger causality runs from government consumption expenditure to GDP. Finally, public debt has a positive impact on the inflation rate in the short run.
Practical implications
The findings imply that government(s) must ensure high fiscal discipline to serve as a precursor for the effective and efficient use of recent borrowing, that is, the loans should be used for highly prioritized projects (preferably investment spending) that are well evaluated and self-sustained to add positively to the GDP.
Originality/value
This paper provides contemporary findings to augment extant literature on public debt and economic growth by using variables and empirical models, which prior studies could not sufficiently cover in a developing country perspective and affirms that public debt contributes to GDP only in the long run.
The complex correlation between public debt and economic growth is very important and is a focus of research within the scientific community and among policy makers. The main purpose of this paper is to identify the correlation between the level of public debt and the level of economic growth in select European Union countries. It is an empirical study of the transmission mechanisms and impact of public debt on economic growth in countries which joined the European Union in 2004 or later. The time range of the analyses covers the years 2000–2019. Estimation of the model parameters shows that the level of public debt had an impact on economic growth only in some countries.
The EU sets strict fiscal criteria for its member states and has introduced initiatives to foster entrepreneurship, competitiveness, and growth. Following the financial crisis, which affected certain Eurozone countries, the EU updated its fiscal rules, establishing a stricter framework. The EU is founded on the principle that fiscal stability facilitates entrepreneurship and competitiveness. Therefore, compliance with fiscal rules improves the business environment. Nonetheless, the literature seems to be divided on this principle. One side argues that fiscal stability positively affects entrepreneurship and competitiveness. The opposing side argues that increased public debt and fiscal deficits do not ex ante affect growth rates. In this article, we attempt to evaluate the relationship between fiscal governance, entrepreneurship, and competitiveness. Descriptive statistics, panel data analysis, and ordinary least squares methods were employed to examine the relationship between fiscal governance indicators and entrepreneurship and competitiveness indicators. We used data from countries that experienced fiscal imbalance, namely Portugal, Greece, Spain, and Italy. According to the findings of our research, fiscal balance positively affected the growth rate in all cases. Yet, that current account balance, unit labor cost, and business birth rate equally affected growth rate and global entrepreneurship index in all countries cannot be supported.
The crux of the study was to ascertain whether (and to what extent) the different deficit financing options impacted inclusive growth in India and Nigeria. The paper conducted an empirical analysis using data covering the period from 1989 to 2018 using the ARDL model. Some interesting results were obtained. First, foreign aid positively impacted inclusive growth in both short and long run for Nigeria. Contrarily, the results for India presented an inverse relationship between aid and inclusive growth with no statistical significance in the short and long run. Second, the impact of borrowing on inclusive growth was significant and negative for short run and long run in India. In the Nigerian case, the findings highlighted a positive and significant effect of borrowing on inclusive growth for both time horizons. Third, on the issue of human capital investments, the government expenditure on education effect on growth inclusiveness was found to be positive and negative in the short and long run, respectively, for India. On the other hand, government expenditure on health was negative in the short run and positive in the long run in Nigeria. Thus, there are a number of relatable policy recommendations viz: (i) Nigeria needs to utilize its borrowing options more effectively by undertaking relevant infrastructural and human capital investments; (ii) Instead of reliance on foreign aid for growth, Nigeria could join the liquidity race by attracting more diaspora remittances like its comparator India; (iii) The government of India should devote even more resources to capital expenditure to drive long-term investments and ensure that a greater number of citizens benefit from the process.
This paper offers a straightforward and descriptive contribution to the recent and busy debate on fiscal discipline made popular by the seminal Reinhart and Rogoff (2010; Growth in a time of debt. American Economic Review, vol. 100, no. 2, 573–78) paper, after policymakers have sought foundation and justification for a policy known as austerity measures, following on from the sovereign debt crisis of 2010. We revisit the debate on whether or not higher debt levels impede growth rates and offer a time series perspective of a corrected data set and a more recent higher-frequency source. We find that with further hindsight, and from a time series perspective, there is little to no support for the view that higher levels of debt cause reductions in economic activity. In contrast to Reinhart and Rogoff (2010), we suggest that economic slumps tend to cause debt build-ups rather than vice versa.
The Union Finance Minister on 20th September, 2019 has announced the highest corporate tax rate cuts in last 28 years as a level playing field for both the existing and green field firms for turning around the sluggish economy. The stimulus package notwithstanding has likely to accelerate the demand in the short run, but to increase the fiscal deficit inasmuch the government would increase its spending through borrowings which could lead to fiscal slippage. Instead of excessive dependence on the fiscal measures, the government should initiate economic and judiciary reforms for accelerating the growth and to improve the doing businesses.
This paper surveys the recent literature on the links between public debt and economic growth in advanced economies. We find that theoretical models yield ambiguous results. Whether high levels of public debt have a negative effect on long-run growth is thus an empirical question. While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that there is no paper that can make a strong case for a causal relationship going from debt to economic growth. We also find that the presence of thresholds and, more in general, of a non-monotone relationship between debt and growth is not robust to small changes in data coverage and empirical techniques. We conclude with a discussion of the challenges involved in measuring and defining public debt and some suggestions for future research which, in our view, should emphasize cross-country heterogeneity.
This paper analyses the Granger-causality relationship between the growth of the real GDP per capita and the public debt, here represented by the ratio of the current primary surplus/GDP and the ratio of the gross Government debt/GDP. Using OECD annual data for 20 countries between 1988 and 2001, we adapt the methodology recently applied by Erdil and Yetkiner (2008) and we conclude that there is clear Granger causality and that it is always bi-directional. In addition, our findings point to a heterogeneous behaviour across the different countries. These results have important policy implications since not only does public debt restrain economic growth, but also real GDP per capita growth influences the evolution of public debt.
This paper looks at the short history of the Eurozone through the lens of an evolutionary approach to forming new institutions. The euro has operated as a currency without a state under the dominance of Germany. This by itself may be good news, as long as Germany does not shirk its growing responsibility for the euro’s future. This would require Germany to invest more in upgrading Eurozone institutions and balancing its dominance gains with the economic and political responsibilities that come with it. Germany’s resilience and dominant size within the EU may explain its ‘muddling-through’ approach toward the Eurozone crisis: doing enough to prevent the unraveling of the Eurozone while resisting policies that may mitigate the depth of the crisis if they involve short-run costs to Germany. We review several manifestations of this muddling-through process. Germany’s attitude toward the Eurozone resembles the attitude of the United States toward the Bretton Woods system in the 1960s – benign neglect of the growing tensions, which led to the ultimate demise of the Bretton Woods system. Chances are that unraveling the Eurozone would be much more costly than the end of the Bretton Woods regime. One hopes that the muddling-through process would work as stepping-stones toward a more perfect euro union, yet hope may not be enough to deliver it.
We put the original Reinhart-Rogoff data-set, made public by Herndon et al. (2013), to a formal econometric test to identify public debt thresholds endogenously. We show that the nonlinear relation between debt and growth is not robust. Taken with a pinch of salt, our results suggest, however, that a negative association between central government debt and growth may set in at debt levels as low as 20% of GDP. Further (and greater) thresholds may exist, but their magnitude is uncertain. For general government debt, the threshold is considerably higher at about 50%. Country-specific estimates reveal a large amount of cross-country heterogeneity. For some countries including the United States, a nonlinear negative link can be detected at about 30% of GDP. For others, no nonlinearities can be established. Our results are a formal econometric confirmation that the 90% public debt threshold is not in the Reinhart-Rogoff data. But our results also seem to suggest that public debt be associated with poor economic performance at fairly moderate public debt levels. The absence of threshold effects or low estimated thresholds may not preclude the emergence of further threshold effects, especially as public debt levels are rising to unprecedentedly high levels.
This paper analyzes the possible presence of Granger causality between debt and growth in 16 OECD countries from 1980 to 2009. This is done considering not only government debt but also non-financial corporate and household debt. The panel bootstrap Granger causality test applied allows us to control for both the presence of cross-country heterogeneity and cross-sectional dependence. Our results barely provide evidence against the null hypothesis according to which government debt does not cause real GDP growth. More interestingly, we find evidence against the absence of causality from non-financial private debt - especially that of households - to growth.
The IMF's Global Integrated Monetary and Fiscal model (GIMF) is used to examine the scope for structural reforms in the euro area to offset the negative impact of fiscal consolidation required to put public debt back on a sustainable path. The results suggest that structural reforms in core countries could be expected to offset the near-term negative impact on activity arising from the required fiscal consolidation. However, for the periphery, the results suggest that it would take several years before structural reforms could return the level of output back to its pre-consolidation path.
This article reanalyses data used by Reinhart and Rogoff (2010c, American Economic Review, 100: 573–78—RR), and later Herndon et al. (2013, Cambridge Journal of Economics, online, doi: 10.1093/cje/bet075) to consider
the relationship between growth and debt in developed countries. The consistency over countries and the causal direction of
RR’s so called ‘stylised fact’ is considered. Using multilevel models, we find that when the effect of debt on growth is allowed
to vary, and linear time trends are fully controlled for, the average effect of debt on growth disappears, whilst country-specific
debt relations vary significantly. Additionally, countries with high debt levels appear more volatile in their growth rates.
Regarding causality, we develop a new method extending distributed lag models to multilevel situations. These models suggest
the causal direction is predominantly growth-to-debt, and is consistent (with some exceptions) across countries. We argue
that RR’s findings are too simplistic, with limited policy relevance, whilst demonstrating how multilevel models can explicate
realistically complex scenarios.
Implementation of fiscal consolidation by advanced economies in coming years needs to take into account the short and long-run interactions between economic growth and fiscal policy. Many countries must reduce high public debt to GDP ratios that penalize longterm growth. However, fiscal adjustment is likely to hurt growth in the short run, delaying improvements in fiscal indicators, including deficits, debt, and financing costs. Revenue and expenditure policies are also critical in affecting productivity and employment growth. This paper discusses the complex relationships between fiscal policy and growth both in the short and in the long run.
In their already-famous 2010 article "Growth-in-a-Time-of-Debt" (AER-100(2)-pp.-573-78), Carmen Reinhart and Kenneth Rogoff show that average post-WW2 economic growth is dramatically declining in advanced economies, once the debt-to-GDP ratio is above a 90% threshold. We explore the relevance of this exogenous threshold using up-to-date econometric techniques, and reveal an endogenously-estimated threshold around a debt-to-GDP ratio of 115%, above which the negative debt-growth link changes sign. Consequently, additional evidence is needed before suggesting policy recommendations regarding growth effects of fiscal policy in such high debt regimes, which may be subject to complex nonlinearities.
This article attempts to re-evaluate the sustainability of the fiscal deficit as well as the long-run macroeconomic relationship between government spending and revenues for three South-European economies under financial market pressure and insolvency; Italy, Greece and Spain. The empirical analysis uses annual data from 1970 to 2010 and employs various cointegration techniques to account for possible linear and nonlinear effects in fiscal policy actions. The evidence for all three countries suggests that, allowing for structural break, (i) the fiscal deficits are weakly sustainable in the long-run, (ii) the spend-and-tax hypothesis is supported and (iii) the budgetary adjustment process is asymmetric in Italy and Spain.
This book confronts the practical problems of modelling aggregate time series data, in a systematic and intergrated framework. The main problem in econometric modelling of time series is discovering sustainable and interpretable relationships between observed economic variables. The primary aim of this book is to develop an operational econometric approach which allows constructive modelling. Professor Hendry deals with methodological issues (model discovery, data mining, and progressive research strategies); with major tools for modelling (recursive methods, encompassing, super exogeneity, invariance tests); and with practical problems (collinearity, heteroscedasticity, and measurement errors). He also includes an extensive study of US money demand. The book is self-contained, with the technical background covered in appendices. It is thus suitable for first year graduate students, and includes solved examples and exercises to facilitate its use in teaching. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/0198283164/toc.html
We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
This paper investigates the channels through which debt affects growth, specifically whether debt affects growth through factor accumulation or total factor productivity growth. It also tests for the presence of nonlinearities in the effects of debt on the different sources of growth. We use a large panel dataset of 61 developing countries over the period 1969-98. Results indicate that the negative impact of high debt on growth operates both through a strong negative effect on physical capital accumulation and on total factor productivity growth. On average, for high-debt countries, doubling debt will reduce output growth by about 1 percentage point and reduce both per capita physical capital and total factor productivity growth by somewhat less than that. In terms of the contributions to growth, approximately one-third of the effect of debt on growth occurs via physical capital accumulation and two-thirds via total factor productivity growth. The results are generally robust to the use of alternative estimators to control (to different extents) for biases associated with unobserved country-specific effects and the endogeneity of several regressors, particularly the debt variables. In particular, the results are shown to be compatible with a simultaneous significant effect of growth on debt ratios, as suggested by Easterly (2001).
This study attempts to identify and trace inter-linkages between sovereign and banking risk in the euro area. To this end, we use an indicator of banking risk in each country based on the Contingent Claim Analysis literature, and 10-year government yield spreads over Germany as a measure of sovereign risk. We apply a dynamic approach to testing for Granger causality between the two measures of risk in 10 euro area countries, allowing us to check for contagion in the form of a significant and abrupt increase in short-run causal linkages. The empirical results indicate that episodes of contagion vary considerably in both directions over time and within the different EMU countries. Significantly, we find that causal linkages tend to strengthen particularly at the time of major financial crises. The empirical evidence suggests the presence of contagion, mainly from banks to sovereigns.
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff members and are published to elicit comment and to encourage debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011
This note raises the IMF’s profile on a number of issues related to inequality, unemployment, governance, etc. It builds on earlier empirical work that examined correlations between growth downbreaks/duration of growth spells and a range of macro/policy/institutional factors. This paper is designed to be more accessible, more policy oriented, and focused squarely on the issue of inequality and the sustainability of growth. It will reference the literature that has gained prominence in the wake of the global crisis, and the possible links between the crisis and rising inequality in countries at the epicenter of the crisis. The analytical findings will also be connected to real world policy narratives in certain countries, to provide texture to the results and enhance policy relevance. The paper will argue that, based on the empirical findings, more equality in the income distribution is associated with longer-lived growth spells. Broad redistributive policies are not necessarily pro-growth, however, as these can have strong disincentive effects. The paper’s policy discussion is appropriately cautious, therefore, offering only tentative ideas, for example, active labor market policies and more attention to human capital investments designed to avoid conflicts between efficiency and equity perspectives.
Recently, Perron has carried out tests of the unit-root hypothesis against the alternative hypothesis of trend stationarity with a break in the trend occurring at the Great Crash of 1929 or at the 1973 oil-price shock. His analysis covers the Nelson-Plosser macroeconomic data series as well as a postwar quarterly real gross national product (GNP) series. His tests reject the unit-root null hypothesis for most of the series. This article takes issue with the assumption used by Perron that the Great Crash and the oil-price shock can be treated as exogenous events. A variation of Perron's test is considered in which the breakpoint is estimated rather than fixed. We argue that this test is more appropriate than Perron's because it circumvents the problem of data-mining. The asymptotic distribution of the estimated breakpoint test statistic is determined. The data series considered by Perron are reanalyzed using this test statistic. The empirical results make use of the asymptotics developed for the test statistic as well as extensive finite-sample corrections obtained by simulation. The effect on the empirical results of fat-tailed and temporally dependent innovations is investigated. In brief, by treating the breakpoint as endogenous, we find that there is less evidence against the unit-root hypothesis than Perron finds for many of the data series but stronger evidence against it for several of the series, including the Nelson-Plosser industrial-production, nominal-GNP, and real-GNP series.
We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets.
Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary
authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality
that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition
of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that
is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that
a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate
mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom
that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These
findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
New evidence is presented on the possible existence of bi-directional causal relationships between public debt and economic growth in both central and peripheral countries of the European Economic and Monetary Union. We test for heterogeneity in the bi-directional Granger-causality across both time and space during the period between 1980 and 2013. The results suggest evidence of a “diabolic loop” between low economic growth and high public debt levels in Spain after 2009. For Belgium, Greece, Italy and the Netherlands debt has a negative effect over growth from an endogenously determined breakpoint and above a debt threshold ranging from 56% to 103% depending on the country.
The global crisis and the expansionary government reaction in many countries have revamped the attention of policymakers and academics on the growth effects of large public debts. Recent empirical studies investigate the impact of public debt on growth in advanced and emerging countries. This article aims at complementing the existing evidence focusing on developing countries, where the increase in domestic borrowing, already started before the crisis, requires a more comprehensive analysis, based not only on external debt, but also on total public debt. Results on a panel of low- and middle-income countries over the period 1990–2007 show that public debt has a negative impact on output growth until it reaches 90 per cent of GDP. Beyond this threshold, the debt effect on growth becomes irrelevant. This nonlinear effect can be explained by country-specific factors, as debt overhang is a growth constraint only in countries with sound macroeconomic policies and stable institutions.
La crise mondiale et les conséquent politiques expansive des gouvernements de plusieurs pays ont amené les décideurs politiques à s′intéresser à nouveau aux effets d′une forte dette publique sur la croissance. Etudes empiriques récents examinent l′impact de la dette publique sur la croissance dans les pays développés aussi bien que dans le pays émergentes. Cet article cherche à apporter des éléments d′information supplémentaires en portant une attention particulière aux pays en développement où la montée de la dette intérieure, datant d′avant la récession, requiert une analyse plus complète qui prenne en compte non seulement la dette extérieure, mais l′ensemble de la dette publique. Les résultats obtenus à partir d′un panel de pays à revenus faibles ou intermédiaires pour la période allant de 1990 à 2007 montrent que la dette publique a un impact négatif sur la croissance au seuil de 90 per cent du PIB, au delà duquel l′effet n′est plus significatif. Cet effet non linéaire s’explique par des facteurs spécifiques à chaque pays puisque le sur-endettement ne constitue une contrainte de croissance que dans les pays pourvus de politiques macroéconomiques saines et d′institutions stables.
While there is ample evidence on the linkage between public debt and economic growth for national economies, far fewer investigations have been carried out at the subnational level. In this paper, we therefore study the long- and short-term relationship between regional public debt intensities and economic output (growth) for German federal states between 1970 and 2010. We estimate dynamic error correction models, which account for heterogeneous transmission mechanisms among federal states and the presence of unobserved common factors such as global macroeconomic shocks. Our findings hint at a significantly negative relationship between regional public debt and per capita GDP in the long run. We further demonstrate that this negative long-term effect is not negligible for the interregional differences in per capita GDP levels. Linking our empirical findings to the current policy debate on fiscal consolidation, we show along the lines of the German case that the decision of enacting a constitutional debt brake for subnational governments to limit the degree of discretionary spending policies together with supplementary measures–such as joint capital market operations by the central and state-level governments to lower borrowing costs–may provide new stimuli for a European-wide debate on the feasibility of solid fiscal consolidation.
We replicate Reinhart and Rogoff (2010A and 2010B) and find that selective exclusion of available data, coding errors and inappropriate weighting of summary statistics lead
to serious miscalculations that inaccurately represent the relationship between public debt and GDP growth among 20 advanced
economies. Over 1946–2009, countries with public debt/GDP ratios above 90% averaged 2.2% real annual GDP growth, not −0.1%
as published. The published results for (i) median GDP growth rates for the 1946–2009 period and (ii) mean and median GDP
growth figures over 1790–2009 are all distorted by similar methodological errors, although the magnitudes of the distortions
are somewhat smaller than with the mean figures for 1946–2009. Contrary to Reinhart and Rogoff’s broader contentions, both
mean and median GDP growth when public debt levels exceed 90% of GDP are not dramatically different from when the public debt/GDP
ratios are lower. The relationship between public debt and GDP growth varies significantly by period and country. Our overall
evidence refutes RR’s claim that public debt/GDP ratios above 90% consistently reduce a country’s GDP growth.
In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks. Then even a small amount of hysteresis—even a small shadow cast on future potential output by the cyclical downturn—means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing. Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present value of future potential output. Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times. Whereas many economists have assumed that the path of potential output is invariant to even a deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed a factor. Although nothing in our analysis calls into question the importance of sustainable fiscal policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation.
The euro area faces three interlocking crises that together challenge the viability of the currency union. There is a banking crisis: banks are undercapitalized and have faced liquidity problems. There is a sovereign debt crisis: a number of countries have faced rising bond yields and challenges funding themselves. Lastly, there is a growth crisis: economic growth is slow in the euro area overall and unequally distributed across countries. These crises connect with one another in several ways: the problems of weak banks and high sovereign debt are mutually reinforcing, and both are exacerbated by weak growth but also in turn constrain growth. This paper details the three crises, their interconnections, and possible policy solutions. Policy responses that fail to take into account the interdependent nature of the problems will likely be incomplete or even counterproductive. A broader point also becomes clear: a currency union may not need a fiscal union, but it does likely need both a financial union and some way to adjust for unbalanced economic conditions across countries.
From the perspective provided by more than three years from the start of the euro area sovereign debt crisis, it can be observed that its origin goes beyond fiscal imbalances in the euro countries. The interconnection between private and public debt is obvious. Moreover, the transmission of the crisis through the banking system is obvious, given the high banking integration between European Economic and Monetary Union (EMU) countries. These facts have led to the analysis carried out in this paper, and presents an attempt to quantify the level of global indebtedness (public and private) of all eurozone countries, using a database that has been built up with the statistics provided by the European Central Bank, and on foreign banks’ claims on the debt of EMU countries, using data supplied by the Bank for International Settlements.
This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point – beyond which the government debt-to-GDP ratio has a negative impact on long-term growth – at about 90–100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70 to 80% of GDP. The channels through which government debt is found to have a non-linear impact on the economic growth rate are private saving, public investment and total factor productivity.
Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the nonlinear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the shortrun impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings.
This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.
In a recent paper, Bai and Perron (1998) considered theoretical issues related to the limiting distribution of estimators and test statistics in the linear model with multiple structural changes. In this companion paper, we consider practical issues for the empirical applications of the procedures. We first address the problem of estimation of the break dates and present an efficient algorithm to obtain global minimizers of the sum of squared residuals. This algorithm is based on the principle of dynamic programming and requires at most least-squares operations of order OOT 2 for any number of breaks. Our method can be applied to both pure and partial structural change models. Second, we consider the problem of forming confidence intervals for the break dates under various hypotheses about the structure of the data and the errors across segments. Third, we address the issue of testing for structural changes under very general conditions on the data and the errors. Fourth, we address the issue of estimating the number of breaks. Finally, a few empirical applications are presented to illustrate the usefulness of the procedures. All methods discussed are implemented in a GAUSS program.
Wagner’s Law is the first model of public spending in the history of public finance. The aim of this study
is to assess its empirical evidence in Italy for the period 1960–2008 at a disaggregated level, using a time
series approach. After a brief introduction, a survey of the economic literature on this issue is shown, before
estimating the specifications of Wagner’s Law for some specific items of public spending (for interests,
for final consumption, for labor dependent income, for grants on production, and for public investments),
according to the Bank of Italy classification. We found a cointegration relationship for three out of five items.
Moreover, results from Granger causality tests show evidence in favor of Wagner’s Law only for passive
interests spending in the long-run, and for dependent labor income spending in the short-run. Some notes
on the policy implications of our empirical results conclude the paper.
© 2012 Published by Elsevier Inc. on behalf of Society for Policy Modeling.
This paper explores the evolving relationship in the volatility of sovereign yields in the European Economic and Monetary Union (EMU). To that end, we examine the behaviour for daily yields for 11 EMU countries (EMU-11), during the 2001-2010 period. In a first step, we decompose volatility in permanent and transitory components using Engel and Lee (1999)'s component-GARCH model. Results suggest that transitory shifts in debt market sentiment tend to be less important determinants of bond-yield volatility than shocks to the underlying fundamentals. In a second step, we develop a correlation and causality analysis that indicates the existence of two different groups of countries closed linked: core EMU countries and peripheral EMU countries. Finally, in a third step, we make a cluster analysis that further supports our results regarding the existence of two different groups of countries, with different positions regarding the stability of public finance.
This paper explores the impact of high public debt on long-run economic growth. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into account a broad range of determinants of growth as well as various estimation issues including reverse causality and endogeneity. In addition, threshold effects, nonlinearities, and differences between advanced and emerging market economies are examined. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.
First published in 2001, Causality in Macroeconomics addresses the long-standing problems of causality while taking macroeconomics seriously. The practical concerns of the macroeconomist and abstract concerns of the philosopher inform each other. Grounded in pragmatic realism, the book rejects the popular idea that macroeconomics requires microfoundations, and argues that the macroeconomy is a set of structures that are best analyzed causally. Ideas originally due to Herbert Simon and the Cowles Commission are refined and generalized to non-linear systems, particularly to the non-linear systems with cross-equation restrictions that are ubiquitous in modern macroeconomic models with rational expectations (with and without regime-switching). These ideas help to clarify philosophical as well as economic issues. The structural approach to causality is then used to evaluate more familiar approaches to causality due to Granger, LeRoy and Glymour, Spirtes, Scheines and Kelly, as well as vector autoregressions, the Lucas critique, and the exogeneity concepts of Engle, Hendry and Richard.
I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008–2009. I also examine policy alternatives to avoid deflation, and how fiscal pressures might lead to inflation. I conclude that the central bank may be almost powerless to avoid deflation or inflation; that an eventual fiscal inflation can come well before large deficits or monetization are realized, and that it is likely to come with stagnation rather than a boom.
A step-wise procedure based on Granger's concept of causality and Abaike's final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process. The model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model. It also provides a reasonably powerful test of causality. The idea is applied to U.S. postwar money and income data. It is found that between M1 and GNP a bivariate feedback model fits the data best; between M2 and GNP a one way causal model (from money to income, performs better. Diagnostic checks applied to our model seem to indicate the adequacy of our approach.
In a neoclassical growth model, it is possible to make a case for public debt because a balanced growth path may be dynamically inefficient. This paper shows that this possibility no longer holds in an endogenous growth model with constant external returns to capital. It is shown that an increase in public debt reduces the growth rate, so there always exists a future generation that will be harmed, and that a reduction in public debt, although it increases the growth rate, cannot be Pareto-improving--one current generation must be harmed. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper provides some new evidence on the credibility of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). The study differs from previous research in the literature in three main respects. First, the main contribution is the use of several credibility indicators, some of which have never been applied before to all of the currencies under study. This allows one to strengthen the results obtained in this paper. Second, a longer period than that of previous studies is analysed, covering the complete EMS history. Third, a comparison has been made of the prediction qualities of the different indicators, in order to explore their ability to capture the main ERM events (realignments, changes in the fluctuations bands and speculative pressures). Fourth, the indicators are applied to the experience of the new, modified ERM linking the currencies of non-euro area Member States to the euro, showing the relevance of this approach in the near future with the enlargement of the European Union.