Government Debt and Macroeconomic Activity: A Predictive Analysis for Advanced Economies

17 Pages Posted: 30 May 2017

See all articles by Deniz Baglan

Deniz Baglan

Howard University

Emre Yoldas

Board of Governors of the Federal Reserve System

Date Written: 2013

Abstract

This paper explores the empirical relationship between government debt and future macroeconomic activity using data on twenty advanced economies throughout the post-war era. We use robust inference techniques to deal with the bias arising from the persistent nature of debt to GDP ratio as an endogenous predictor of GDP growth. Our results show that statistical significance of the coefficient on the debt ratio in predictive regressions changes considerably with the use of robust inference techniques. For countries with relatively low average debt ratios we find a negative threshold effect as their debt ratios increase toward moderate levels. For countries with chronically high debt ratios, GDP growth slows as relative government debt increases, but we find no significant threshold effect.

Suggested Citation

Baglan, Deniz and Yoldas, Emre, Government Debt and Macroeconomic Activity: A Predictive Analysis for Advanced Economies (2013). FEDS Working Paper No. 2013-05, Available at SSRN: https://ssrn.com/abstract=2976702

Deniz Baglan (Contact Author)

Howard University ( email )

2400 Sixth Street, NW
Washington, DC 20059
United States

Emre Yoldas

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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