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

68 Pages Posted: 23 Dec 2013

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

M. Hashem Pesaran

University of Southern California - Department of Economics

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 23, 2013

Abstract

This paper investigates the long-run effects of public debt and inflation 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 find significant negative long-run effects of public debt and inflation 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 find a universally applicable threshold effect in the relationship between public debt and growth. We only find statistically significant 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, inflation and growth, debt overhang

JEL Classification: C230, E620, F340, H600

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 (December 23, 2013). CESifo Working Paper Series No. 4508, Available at SSRN: https://ssrn.com/abstract=2371243

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 (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

M. Hashem Pesaran

University of Southern California - Department of Economics ( email )

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

Mehdi Raissi

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

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

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