Debt-growth linkages in EMU across countries and time horizons

Thumbnail Image
Full text at PDC
Publication Date
Advisors (or tutors)
Journal Title
Journal ISSN
Volume Title
Instituto Complutense de Estudios Internacionales (ICEI)
Google Scholar
Research Projects
Organizational Units
Journal Issue
This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country.
Abbas S., Ali, M., Jakob, C. 2007. The Role of Domestic Debt Markets in Economic Growth: An Empirical Investigation for Low–Income Countries and Emerging Markets. Working Paper 07/127. International Monetary Fund, Washington, D. C. Afonso, A., Furceri, D. 2010. Government size, composition, volatility and economic growth. European Journal of Political Economy, 26, 517-532. Alesina, A., Barbiero, O., Favero, C., Giavazzi, F., Paradisi, M. 2015. Austerity in 2009-2013. Working Paper 20827, National Bureau of Economic Research, Cambridge, MA. Alter, A., Schüler, Y. S. 2012. Credit spread interdependencies of European states and banks during the financial crisis. Journal of Banking and Finance, 36, 3444-3468. Alter, A., Beyer, A. 2014. The dynamics of spillover effects during the European sovereign debt turmoil. Journal of Banking and Finance, 42, 134–153. Aizenman, J., Kletzer, K., Pinto B. 2007. Economic growth with constraints on tax revenues and public debt: Implications for fiscal policy and cross-country differences. Working Paper 12750, National Bureau of Economic Research, Cambridge, MA. Antonakakis, N. 2014. Sovereign debt and economic growth revisited: The role of (non-) sustainable debt thresholds. Working Paper 187, Department of Economics, Vienna University, Vienna. Aschauer, D. A. 1989. Is public expenditure productive? Journal of Monetary Economics, 23, 177-200. Baier, S. L., Glomm, G. 2001. Long-run growth and welfare effects of public policies with distortionary taxation. Journal of Economic Dynamics and Control, 25, 2007-2042. Banerjee, A., Dolado, J., Mestre, R. 1998. Error-correction mechanism tests for cointegration in a single-equation framework. Journal of Time Series Analysis 19, 267–283. Barro, R. J. 1979. On the determination of the public debt. The Journal of Political Economy 87, 940–971. Barro, R. J. 1990. Government spending in a simple model of endogenous growth. Journal of Political Economy, 98, S103-S125. Baum, A., Checherita-Westphal, C., Rother, P. 2013. Debt and growth: New evidence for the Euro Area. Journal of International Money and Finance, 32, 809-821. Becker, G. S. 1962. Investment in Human Capital: A theoretical analysis. Journal of Political Economy 70, 9-49. Becker, G. S. 2007. Health as human capital: Synthesis and extensions. Oxford Economic Papers, 59, 379-410. Berg, A., Ostry, J. 2011. Inequality and unsustainable growth: Two sides of the same coin. Staff Discussion Note 11/08, International Monetary Fund, Washington DC. Checherita-Westphal, C., Rother, P. 2012. The impact of high government debt on economic growth and its channels: An empirical investigation for the Euro Area. European Economic Review, 56, 1392-1405. Center for Economic Policy Research (2014). Euro Area Business Cycle Dating Committee: Euro Area Mired in Recession Pause. Centre for Economic Policy Research, London. Cerra, V., Saxena, S. C. 2008. Growth Dynamics: The Myth of Economic Recovery. American Economic Review 98, 439–57. Cheung, Y.-W. , Chinn, M. D. 1997. Further investigation of the uncertain unit root in GNP. Journal of Business and Economic Statistics, 15, 68-73. Cochrane, J. H. 2011. Understanding policy in the Great Recession: Some unpleasant fiscal arithmetic. European Economic Review, 55, 2–30. Cottarelli, C., Jaramillo, L. 2013. Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies. Review of Economics and Institutions 4, 1-25. De Bruyckere, V., Gerhardt, M., Schepens, G., Vennet, R.V. 2013. Bank/sovereign risk spillovers in the European debt crisis. Journal of Banking and Finance, 37, 4793–4809. De Hek, P. 2006. On taxation in a two-sector endogenous growth model with endogenous labor supply. Journal of Economic Dynamics and Control, 30, 655–685. Delong, B. J., Summers, L. H. 2012. Fiscal policy in a depressed economy, Brookings Papers on Economic Activity (Spring), 233-274. Devarajan, S., Swaroop, V., Zou, H. 1996. The composition of public expenditure and economic growth. Journal of Monetary Economics, 37, 313- 344. Dreger, C., Reimers, H. E. 2013. Does euro area membership affect the relation between GDP growth and public debt? Journal of Macroeconomics, 38, 481–486. Eberhardt, M., Presbitero, A. F. 2015. Public debt and growth: Heterogeneity and nonlinearity. Journal of International Economics 97, 45-58. Égert, B. 2015. The 90% public debt threshold: The rise and fall of a stylised fact. Applied Economics, 47, 3756-3770. Elmendorf, D., Mankiw, N. G. 1999. Government debt. In J. B. Taylor, M. Woodford (eds), Handbook of Macroeconomics, Vol. 1C. Amsterdam: North-Holland, pp. 1615-1669. Elliott, G., Rothenberg, T. J., Stock, J. H. 1996. Efficient tests for an autoregressive unit root, Econometrica 64, 813-836. Engle, R. F., Granger, C. W. J. 1987. Co-integration and error correction: Representation, estimation and testing. Econometrica, 55, 251–276. European Commission. 1995. The impact of exchange-rate movements on trade within the Single Market. European Economy, 4, 1-94. Fölster, S., Henrekson, M. 1999. Growth and the public sector: A critique of the critics. European Journal of Political Economy, 15, 337-358. Frankel, M. 1962. The production function in allocation and growth: A synthesis. American Economic Review 52, 996-1022. Gómez-Puig, M. 2013. Crisis de la deuda soberana y apalancamiento en la Zona Euro: Un intento de cuantificación. Cuadernos de Economía: Spanish Journal of Economics and Finance, 36, 67-83. Gómez-Puig, M., Sosvilla-Rivero, S. 2015. The causal relationship between public debt and economic growth in EMU countries. Journal of Policy Modeling, 37, 974–989. Ghosh, A. R., Kim, J.I., Mendoza, E. G., Ostry, J.D., Qureshi, M.S. 2013. Fiscal fatigue, fiscal space and debt sustainability in advanced economies. The Economic Journal 123, F4–F30. Glomm, G., Ravikumar, B. 1997. Productive government expenditures and long- run growth. Journal of Economic Dynamics and Control, 21, 183–204. Greiner, A. 2012. Public debt in a basic endogenous growth model. Economic Modelling, 29, 1344–1348. Hakkio, C. G., Rush, M. 1991. Cointegration: how short is the long run? Journal of International Money and Finance, 10, 571-581. Jacquemin, A., Sapir, A. 1996. Is a European hard core credible? A statistical analysis. Kyklos, 49, 105-117. Jayachandran, S., Lleras-Muney, A. 2009. Life expectancy and human capital investments: Evidence from maternal mortality declines. Quarterly Journal of Economics, 124, 349-397. Jetter, M. 2014. Volatility and growth: Governments are key. European Journal of Political Economy, 36, 71-88. Johansen, S. 1991. Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580. Johansen, S. 1995. Likelihood-based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press, Oxford. Krugman, P. 1988. Financing vs. forgiving a debt overhang. Journal of Development Economics 29, 253-268. Krugman, P. 2011. Self-defeating Austerity, New York Times, July 7. Kwiatkowski, D., Phillips, P. C. B, Schmidt, P., Shin, Y. 1992. Testing the null hypothesis of stationary against the alternative of a unit root. Journal of Econometrics, 54, 159-178. Ledesma-Rodríguez, F., Navarro-Ibáñez, M, Pérez-Rodríguez, J., Sosvilla-Rivero, S. 2005. Assessing the credibility of a target zone: Evidence from the EMS. Applied Economics, 37, 2265-2287. Loazya, N. 1996. The Economics of the informal sector: A simple mode and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy, 45, 129-162. Lof, M., Malinen, T. 2014. Does sovereign debt weaken economic growth? A panel VAR analysis. Economics Letters 122, 403–407. Mankiw, N. G., Romer, D., Weil, D. N. 1992. A Contribution to the Empirics of Economic Growth. Quarterly Journal of Economics 107, 407–437. Markus, A., Rainer, S. 2016. Public debt and economic growth: Economic systems matter, Discussion Papers, Center for European Governance and Economic Development Research, No. 281. Ng, S., Perron, P. 2001. Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, 1519-1554. Ostry, J. D., Ghosh, A. R., Kim, J. I., Qureshi, M. S. 2010. Fiscal Space. IMF Staff Position Note 10/11, International Monetary Fund, Washington DC. Panizza, H., Presbitero, A. F. 2013. Public debt and economic growth in advanced economies: A survey. Swiss Journal of Economics and Statistics, 149, 175-204. Pattillo, C., Poirson, H., Ricci, L.A. 2011. External Debt and Growth. Review of Economics and Institutions 2, 1-30. Perotti, R. 2012. The “Austerity Myth” Gain Without Pain? in Fiscal Policy after the Financial Crisis, NBER Chapters. National Bureau of Economic Research, Inc. Pesaran, M. H., Shin, Y. 1999. An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium), Cambridge: Cambridge University Press, pp. 371-413. Pesaran, M. H., Shin, Y. Smith, R. J. 2001. Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326. Phillips, P. C. B., Perron, P. 1988. Testing for a unit root in times series regression. Biometrika, 75, 335-346. Reinhart, C. M., Rogoff, K. S. 2010. Growth in a time of debt. American Economic Review, 100, 573-578. Romero-Ávila, D., Strauch, R. 2008. Public finances and long-term growth in Europe: Evidence from a panel data analysis. European Journal of Political Economy, 24, 172-191. Sachs, J. D., Warner, A. W. 1997. Fundamental sources of long-run growth. American Economic Review, 87, 184-188. Savvide, A., Stengos, T. 2009. Human Capital and Economic Growth. Stanford, CA: Stanford University Press. Salotti, S., Trecroci, C. 2016. The impact of government debt, expenditure and taxes on aggregate investment and productivity growth. Economica 83, 356–384. Shambaugh, J. C. 2012. The euro’s three crises. Brookings Papers on Economic Activity, 44 (Spring), 157-211. Singh, M. K., Gómez-Puig, M., Sosvilla-Rivero, S. 2016. Sovereign-bank linkages: Quantifying directional intensity of risk transfers in EMU countries. Journal of International Money and Finance, 63, 137-164. Solow, R.M. 1956. A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics 70, 65-94. Sosvilla-Rivero, S., Morales-Zumaquero, A. 2012. Volatility in EMU sovereign bond yields: Permanent and transitory components. Applied Financial Economics, 22, 1453-1464. Tanzi, V., Zee, H. H. 1997. Fiscal policy and long-run growth. IMF Staff Papers, 44, 179–209. Teles. V. K., Mussolini, C. C. 2014. Public debt and the limits of fiscal policy to increase economic growth. European Economic Review, 66, 1–15. Woo, J., Kumar, M. S. 2015. Public debt and growth. Economica, 82, 705-739.