Institutions, Public Debt and Growth in Europe

38 Pages Posted: 20 Sep 2016

See all articles by Klaus Masuch

Klaus Masuch

European Central Bank (ECB)

Edmund Moshammer

European Stability Mechanism

Beatrice Pierluigi

European Central Bank (ECB)

Date Written: September 19, 2016

Abstract

This paper shows that initial cross-country institutional differences can explain to a substantial extent the relative GDP performance of European countries since 1995, after controlling for the initial level of GDP per capita and government debt. It shows that improving the quality of institutions could lead to significantly higher per capita GDP. It also shows that an initial government debt level above a threshold (e.g. 60-70%) coupled with institutional quality below the EU average tends to be associated with particularly poor subsequent real growth performance during this period. Interestingly, the detrimental effect of high debt levels seems cushioned by the presence of very sound institutions. This might be because good institutions help to alleviate the debt problem in various ways, e.g. by ensuring sufficient fiscal consolidation in the longer-run, allowing for better use of government expenditures and promoting sustainable growth, social fairness and more efficient tax administration. The results are confirmed across a large sample of countries, also including OECD countries outside Europe.

The empirical findings on the importance of institutions are robust to various measures of output growth, different measures of institutional indicators, different sample sizes, different country groupings and to the inclusion of additional control variables. Overall, the results tend to support the call for structural reforms in general and reforms enhancing the efficiency of public administration and regulation, the rule of law and the fight against rent-seeking and corruption in particular.

Keywords: quality of institutions and real growth, public governance, structural reforms, public debt, panel estimates

JEL Classification: O43, C23, E02, H63

Suggested Citation

Masuch, Klaus and Moshammer, Edmund and Pierluigi, Beatrice, Institutions, Public Debt and Growth in Europe (September 19, 2016). ECB Working Paper No. 1963. Available at SSRN: https://ssrn.com/abstract=2840639

Klaus Masuch (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Edmund Moshammer

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Beatrice Pierluigi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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