Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we use a dynamic threshold panel methodology in order to analyse the non-linear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the short-run impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings.Keywords: Public debt, economic growth, fiscal policy, threshold analysis JEL Classification: H63, O40, E62, C20 1 2 Non-technical summaryThe fiscal situation remains challenging in much of the developed world, particularly in the euro area. Market concerns with respect to fiscal sustainability in vulnerable euro area countries have grown and spread to other countries. Against this background, empirical research has started to focus on estimates of the impact of public debt on economic activity.Looking at the debt-growth nexus literature, two characteristics become apparent. First, only few studies focus on euro area countries. This is insofar surprising as the euro area/EMU offers economic dynamics that are rarely found anywhere else in the world. Moreover, this group of countries is in need of special attention given the current sovereign debt crisis. Second, most of the empirical studies still rely on linear estimation frameworks. Only more recently has the focus been shifting to nonlinear threshold analyses, inter alia by employing the threshold panel methodology developed by Hansen (1999). However, all of these studies focus exclusively on nondynamic panel models, which might lead to inconsistent results due to the persistence of GDP growth rates. To our best knowledge our paper is the first to account for this problem through application of a dynamic threshold framework. Comparing the results from dynamic and non-dynamic threshold estimations provides an idea not only about the robustness of the impact of debt on growth, but also about the robustness of the estimated optimal debt ratios.Our paper adds to the existing literature in the following ways. First, we use a dynamic threshold panel methodology in order to analyse the non-linear impact of public debt on GDP growth. Second, in comparison to the majority of empirical studies we analyse the short-run relationship between public debt and economic growth using yearly...

No abstract

We study the determinants of sovereign debt credit ratings using rating notations from the three main international rating agencies, for the period 1995-2005. Using linear methods and ordered response models we employ a new specification that allows us to distinguish between short and long-run effects, on a country's rating, of several macroeconomic and fiscal explanatory variables. The results point to a good performance of the estimated models, across agencies and time, as well as a good overall prediction power. Changes in GDP per capita, GDP growth, government debt, government balance have a short-run impact on a country's credit rating, while government effectiveness, external debt, foreign reserves and default history are important long-run determinants.JEL: C23; C25; E44; F30; G15

No abstract

In 2005 all ECB publications will feature a motif taken from the €50 banknote. WO R K I N G PA P E R S E R I E S N O. 4 7 3 / A P R I L 2 0 0 5 C O N T E N T S Abstract 4Non-technical summary 5