Regime-based debt sustainability analysis: Evidence from euro area economies

25 Pages Posted: 9 Jun 2022 Last revised: 15 Jun 2022

See all articles by Bettina Bökemeier

Bettina Bökemeier

Bielefeld University - Department of Business Administration and Economics

Benjamin Owusu

Bielefeld University - Department of Business Administration and Economics

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: May 1, 2022

Abstract

This paper empirically studies non-linearities in debt sustainability analysis by resorting to the modern estimation technique of panel smooth transition regression (PSTR). We assess euro area debt sustainability by analysing the reaction of the primary balance to changes in public debt, relative to GDP respectively, in annual frequency from 2000-2019 in a panel framework. The PSTR allows to estimate the existence of a threshold in the behaviour of the reaction function, refrains from the country-wise perspective (pooling) and applies a regime-switching model to detect non-linearities. Data is segregated into different regimes endogenously via a logistics regression. Our results show that there are two different regimes in the euro area: a high and a low debt regime. The estimated reaction coefficient for the low debt regime is statistically insignificant, whereas it is positive and statistically significant for the high debt regime. Further, for a sub-sample of highly indebted economies we find a statistically significant negative (positive) reaction coefficient for the low (high) debt regime.

Keywords: Debt Sustainability, Fiscal Response Function, Panel Smooth Transition Regression

JEL Classification: H63, E62

Suggested Citation

Bökemeier, Bettina and Owusu, Benjamin and Greiner, Alfred, Regime-based debt sustainability analysis: Evidence from euro area economies (May 1, 2022). Bielefeld Working Papers in Economics and Management No. 04-2022, Available at SSRN: https://ssrn.com/abstract=4131250 or http://dx.doi.org/10.2139/ssrn.4131250

Bettina Bökemeier (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Benjamin Owusu

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

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