Is There a Debt-threshold Effect on Output Growth?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Is there a Debt-Threshold Effect on Output Growth? Abstract This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with crosssectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965-2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers. Terms of use: Documents inJEL-Code: C230, E620, F340, H600.

Heterogeneity in the debt-growth nexus: Evidence from EMU countries

“…According to Mitze and Matz (2015), whilst a "first generation" of empirical cross-country studies predominantly predicted an inverted U-shape relationship between public debt and economic growth, with a negative impact on growth particularly in highly indebted countries, more recently a "second generation" of empirical contributions has challenged those findings on various grounds, including uncontrolled sample heterogeneity. The "first generation" of papers include the works by Reinhart and Rogoff (2010), Pattillo et al (2011), Lof and Malinen (2014) and Woo and Kumar (2015); whilst the "second generation" include Ghosh et al (2013), Markus and Rainer (2016), Chudik et al (2017), Pescatori et al (2014 or Edberhardt and Presbitero (2015).…”

“…Markus and Rainer (2016) point out that, due to specific institutional characteristics concerning fiscal flexibility, fiscal effectiveness and fiscal consistency, different economic systems entail different degrees of fiscal uncertainty, which to a large extent shape the investment climate at comparable levels of public debt and thus constitute a source of heterogeneity in the relationship between high public debt levels and long-run economic growth. Chudik et al (2017) and Pescatori et al (2014) identify the debt trajectory as a source of heterogeneity in the debt-growth relationship, suggesting that high but falling public debt levels are growth-neutral while high and rising debt levels are detrimental for economic activity. Finally, according to Eberhardt and Presbitero (2015), there are many possible reasons for the differences in the relationships between public debt and growth across countries.…”

Does Public Debt Hamper Economic Growth: Evidence From European Transitional Countries

“…In addition, they claimed that R&R oversimplified the relationship between debt and GDP growth, since no possible single threshold can be applied to each country. In addition, Chudik et al (2015) conclude that some economies have run into debt difficulties and experienced low growth at low debt levels, while others at high levels of indebtedness for prolonged periods have grown strongly, thus the effect of debt on growth varies among countries. Dreger and Reimers (2013) study the effect of the debt ratio on GDP per capita growth rate for two groups of countries, euro-zone members and non-euro-zone European economies, and further separate the situations in sustainable and non-sustainable debt states.…”

Philosophy of Economics: The Constructivist and Scientific Realist Interpretation of Macroeconomics

“…Maziarz 2017: 222-223). Recently, Chudik et al (2017) argued that the threshold levels vary and are country-specific. Considering that the majority of analyses is based on the data set delivered by Reinhart andRogoff (2010, 2009), the divergent results are constructed by various cliometric and econometric techniques.…”