Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt?

17 Pages Posted: 13 Oct 2012

See all articles by Christian Dreger

Christian Dreger

German Institute for Economic Research (DIW Berlin); European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

Hans-Eggert Reimers

Hochschule Wismar

Date Written: October 2012

Abstract

We analyse the relationship between the debt to GDP ratio and real per capita GDP growth for the euro area members by distinguishing between periods of sustainable and non-sustainable debt. Thresholds are theory-based and depend on the macroeconomic framework. If the interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable debt ratio. The negative impact of the debt to GDP ratio is particularly strong for non sustainable ratios and especially relevant for the euro area. This suggests that the participation in monetary union might entail an additional risk for its members.

Keywords: Euro area debt crisis, debt sustainability

JEL Classification: F43, O11, C23

Suggested Citation

Dreger, Christian and Reimers, Hans-Eggert, Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt? (October 2012). DIW Berlin Discussion Paper No. 1249. Available at SSRN: https://ssrn.com/abstract=2160776 or http://dx.doi.org/10.2139/ssrn.2160776

Christian Dreger (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

Hans-Eggert Reimers

Hochschule Wismar ( email )

FB Wirtschaft
Philipp-Mueller-Str. PF 1210
23952 Wismar
Germany
49-3841-753-601 (Phone)
49-3841-753-383 (Fax)

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