Public Debt and Economic Growth – Economic Systems Matter

29 Pages Posted: 2 Mar 2016

See all articles by Markus Ahlborn

Markus Ahlborn

Georg-August Universität Göttingen

Rainer Schweickert

University of Kiel - Institute for World Economics (IfW)

Date Written: March 2, 2016

Abstract

Most studies on the relationship between public debt and economic growth implicitly assume homogeneous debt effects across their samples. We – in accordance with recent literature – challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinavian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of heterogeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, while for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.

Keywords: Public Debt, Economic Growth, Economic Systems, Fiscal Policy, Welfare State

JEL Classification: E62, P10, P51, H10

Suggested Citation

Ahlborn, Markus and Schweickert, Rainer, Public Debt and Economic Growth – Economic Systems Matter (March 2, 2016). Available at SSRN: https://ssrn.com/abstract=2740988 or http://dx.doi.org/10.2139/ssrn.2740988

Markus Ahlborn (Contact Author)

Georg-August Universität Göttingen ( email )

Platz der Göttinger Sieben 5
Goettingen, 37073
Germany

Rainer Schweickert

University of Kiel - Institute for World Economics (IfW) ( email )

Duesternbrooker Weg 120
D-24118 Kiel
Germany

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