Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models

68 Pages Posted: 21 Nov 2013

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

Kamiar Mohaddes

University of Cambridge - Faculty of Economics and Politics; University of Cambridge - Girton College

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Mehdi Raissi

International Monetary Fund (IMF) - Asia and Pacific Department

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2013

Abstract

This paper investigates the long-run effects of public debt and infl‡ation on economic growth. Our contribution is both theoretical and empirical. On the theoretical side, we develop a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in dynamic heterogeneous panel data models with cross-sectionally dependent errors. The relative merits of the CS-DL approach and other existing approaches in the literature are discussed and illustrated with small sample evidence obtained by means of Monte Carlo simulations. On the empirical side, using data on a sample of 40 countries over the 1965-2010 period, we fi…nd signifi…cant negative long-run effects of public debt and in‡flation on growth. Our results indicate that, if the debt to GDP ratio is raised and this increase turns out to be permanent, then it will have negative effects on economic growth in the long run. But if the increase is temporary, then there are no long-run growth effects so long as debt to GDP is brought back to its normal level. We do not fi…nd a universally applicable threshold effect in the relationship between public debt and growth. We only …find statistically signifi…cant threshold effects in the case of countries with rising debt to GDP ratios.

Keywords: Long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence, debt, in‡ation and growth, debt overhang

JEL Classification: C23, E62, F34, H6

Suggested Citation

Chudik, Alexander and Mohaddes, Kamiar and Pesaran, M. Hashem and Raissi, Mehdi, Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models (November 1, 2013). CAFE Research Paper No. 13.23. Available at SSRN: https://ssrn.com/abstract=2357065

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Kamiar Mohaddes

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
+44 (0) 1223338904 (Phone)

HOME PAGE: http://people.ds.cam.ac.uk/km418

University of Cambridge - Girton College ( email )

Cambridge, CB3 0JG
United Kingdom
+44 (0)1223 338999 (Phone)
+44 (0)1223 338896 (Fax)

HOME PAGE: http://people.ds.cam.ac.uk/km418

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Mehdi Raissi

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/mehdiraissi/

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