Download this Paper Open PDF in Browser

Heterogeneity in the Debt-Growth Nexus: Evidence from EMU Countries

BATH Economics Research Paper No. 61/17

36 Pages Posted: 3 Apr 2017  

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Simón Sosvilla Rivero

Complutense Institute for International Studies

Date Written: March 30, 2017

Abstract

The objective of this paper is to examine whether the threshold beyond which public debt may have a detrimental effect on economic growth changes across euro area countries during the 1961-2015 period. In contrast with previous studies, we do not use panel estimation techniques, but implement a time-series analysis for each country based on the growth literature. The results suggest that in all the countries but Belgium a debt increase begins to have detrimental effects on growth well before the SGP debt ceiling (a debt ratio of around 40% and 50% in central and peripheral countries, respectively) is reached. So, although austerity policies should be applied in EMU countries – since according to our results debt reduction barely exerts any significant beneficial impact on EMU countries’ growth – they should be accompanied by structural reforms that can increase their potential GDP. Moreover, as our results suggest that the harmful impact of debt on growth does not occur beyond the same threshold and with the same intensity in all EMU countries, a focus on average ratios and impacts may be unsuitable for defining policies. Specifically, our findings suggest that the pace of fiscal adjustment should be lower in Greece and Spain than in the other countries.

Keywords: Public Debt, Economic Growth, Heterogeneity, Euro Area, Peripheral EMU Countries, Central EMU Countries

JEL Classification: C22, F33, H63, O40, O52

Suggested Citation

Gómez-Puig, Marta and Sosvilla Rivero, Simón, Heterogeneity in the Debt-Growth Nexus: Evidence from EMU Countries (March 30, 2017). BATH Economics Research Paper No. 61/17. Available at SSRN: https://ssrn.com/abstract=2943255 or http://dx.doi.org/10.2139/ssrn.2943255

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Simón Javier Sosvilla Rivero (Contact Author)

Complutense Institute for International Studies ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Paper statistics

Downloads
20
Abstract Views
131