The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area

Checherita‐Westphal, Cristina; Rother, Philipp

doi:10.1016/j.euroecorev.2012.06.007

Cited by 493 publications

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“…Samples differ significantly across existing studies, with the work by Kumar and Woo (2010), Cecchetti et al (2011), Checherita-Westphal andRother(2012), Baum, et al (2013), and Panizza and Presbitero (2014) primarily focused on OECD and other high-income economies and thus most relevant to this study. Among these OECD country studies the only one to adopt a polynomial specification is the paper by Checherita-Westphal and Rother (2012), although this practice is popular in the study of developing economies (e.g. Cordella, et al, 2010;Calderon and Fuentes, 2013; Pres-10 bitero, 2012).…”

Section: Existing Literaturementioning

confidence: 95%

“…42 11 Parts of the literature, including Baum, et al (2013), employ threshold regression algorithms where the threshold value is determined endogenously. Extending the co-summability approach in a similar fashion is beyond the scope of this study.…”

Section: Discussionmentioning

confidence: 99%

“…3 The standard practice in the cross-country literature to average data over threeor five-year intervals in the panel is also adopted in all but the most recent papers (ChecheritaWestphal and Rother, 2012;Baum, et al, 2013;Panizza and Presbitero, 2014). Samples differ significantly across existing studies, with the work by Kumar and Woo (2010), Cecchetti et al (2011), Checherita-Westphal andRother(2012), Baum, et al (2013), and Panizza and Presbitero (2014) primarily focused on OECD and other high-income economies and thus most relevant to this study. Among these OECD country studies the only one to adopt a polynomial specification is the paper by Checherita-Westphal and Rother (2012), although this practice is popular in the study of developing economies (e.g.…”

Section: Existing Literaturementioning

confidence: 99%

“…The popularity of the 'growth' specification in the cross-country empirical literature is justified by the presence of the lagged level of per capita GDP as additional regressor (as is the case for the 'debt-growth' analysis of Kumar and Woo, 2010;Cecchetti, et al, 2011;Checherita-Westphal and Rother, 2012;Baum, et al, 2013; among others). This quasi-error correction specification provides estimates for a long-run levels relationship although researchers frequently refer to this type of specification as a 'growth' equation (see Eberhardt and Teal, 2011).…”

mentioning

confidence: 99%

“…Perhaps aware of the tension between the causal interpretation typically read into this type of statement and the descriptive nature of their analysis, some of their earlier work (Reinhart, Reinhart and Rogoff, 2012) already pointed to a set of empirical studies which are argued to address both concerns regarding causality and identification of a nonlinearity in the long-run debt-growth relationship (e.g. Kumar and Woo, 2010;Balassone, Francese and Pace, 2011;Cecchetti, Mohanty and Zampolli, 2011;Checherita-Westphal and Rother, 2012) 1 in support of their findings. …”

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Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Eberhardt

2017

Macroecon. Dynam.

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A note on versions:The version presented here may differ from the published version or from the version of record. If you wish to cite this item you are advised to consult the publisher's version. Please see the repository url above for details on accessing the published version and note that access may require a subscription.For more information, please contact eprints@nottingham.ac.uk Nonlinearities in the relationship between debt and growth: (no) evidence from over two centuries 2 Abstract: I revisit the popular concern over a nonlinearity or threshold in the relationship between public debt and growth employing long time series data from up to 27 countries. My empirical approach recognises that standard time series arguments for long-run equilibrium relations between integrated variables (cointegration) break down in nonlinear specifications such as those predominantly applied in the existing debt-growth literature. Adopting the novel co-summability approach my analysis overcomes these difficulties to find no evidence for a systematic long-run relationship between debt and growth in the bivariate and economic theory-based multivariate specifications popular in this literature.Keywords: public debt; economic growth; nonlinearity; summability and co-summability JEL classification: H63, C22, E62, O40 3 1 Introduction "The latest research [by Reinhart and Rogoff] suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant."George Osborne, Mais Lecture, February 24, 2010 "The study [Reinhart and Rogoff (2010b)] found conclusive empirical evidence that total debt exceeding 90 percent of the economy has a significant negative effect on economic growth."'The Path to Prosperity,' House Committee on the Budget, April 5, 2011 Despite the rhetoric adopted by a number of governments and opposition parties over recent years, determining a causal link from public debt to long-run growth as well as the potential nonlinearity of this relationship are widely regarded as unresolved empirical issues (IMF, 2012;Panizza and Presbitero, 2014). As above quotes indicate the most influential research on the debt-growth nexus in recent years is unarguably the work by Reinhart and Rogoff (2010b) which has been adopted as justification for fiscal austerity measures by politicians on both sides of the Atlantic. Although recent revelations challenged the descriptive analysis carried out in their paper, Reinhart and Rogoff 4 maintain that "the weight of the evidence to date -including this latest comment [by Herndon, Ash and Pollin, 2014] -seems entirely consistent with our original interpretation of the data" (Wall Street Journal 'Real Time Economics' blog, April 16, 2013), namely that "high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes" (Reinhart and Rogoff, 2010b: 577; see also Rogoff, 2013). Perhaps aware of the tension between the causal interpretation typically read into this type of statement and ...

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Section: Existing Literaturementioning

confidence: 95%

Section: Discussionmentioning

confidence: 99%

Section: Existing Literaturementioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

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Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Eberhardt

2017

Macroecon. Dynam.

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Debt and growth: Decomposing the cause and effect relationship

Swamy

2019

Int. J Fin Econ

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This study provides a data‐rich analysis of the dynamics of government debt and economic growth for a longer period (1960–2009). It spans across different debt regimes and involves a worldwide sample of countries that is more representative than that of studies confined to advanced countries. This study observes a negative relationship between government debt and growth. The point estimates of the range of econometric specifications suggest that a 10‐percentage point increase in the debt‐to‐gross domestic product ratio is associated with 23 basis point reduction in average growth. The results establish the nonlinear relationship between debt and growth. Further, by employing panel vector autoregressions approach, this study decomposes the cause and effect relationship between debt and growth and offers an answer to the question—Does high debt lead to low growth or low growth leads to high debt? The results derived from the impulse–response functions and variance decomposition show the evidence of the long‐term effect of debt on economic growth. The results indicate that the effect is not uniform for all countries but depends mostly on the debt regimes and other important macroeconomic variables like inflation, trade openness, general government final consumption expenditure, and foreign direct investment.

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What matters for finance‐growth nexus? A critical survey of macroeconomic stability, institutions, financial and economic development

Ehigiamusoe

Samsurijan

2020

Int. J Fin Econ

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This paper analyses the variables that moderate the impact of financial development on economic growth based on theoretical and empirical evidences. We show that financial and economic development, institutions and macroeconomic stability are the fundamental variables that moderate the finance‐growth nexus. Specifically, higher levels of financial and economic development, institutional quality and macroeconomic stability promote the impact of financial development on economic growth, while lower levels of these variables could have the opposite effect. We also show that too much finance is deleterious to economic growth, suggesting the existence of a threshold level of financial development beyond which further finance inhibits, rather than enhances growth. The economic implication of this study is that a stable macroeconomic environment, higher level of institutional quality, optimum financial and economic development are necessary conditions for finance to accelerate growth. Hence, countries that want to promote economic growth through the financial sector should give adequate priority to these variables.

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The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area

Cited by 493 publications

References 14 publications

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Debt and growth: Decomposing the cause and effect relationship

What matters for finance‐growth nexus? A critical survey of macroeconomic stability, institutions, financial and economic development

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