Does euro area membership affect the relation between GDP growth and public debt?
AbstractWe analyse the relationship between the debt-to-GDP ratio and real per capita GDP growth for euro area members and a broader set of industrial countries by distinguishing periods of sustainable and non-sustainable debt. Thresholds for debt are theory-driven and depend on macroeconomic conditions. If the nominal interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable government debt ratio. The negative impact of the debt-to-GDP ratio is limited to the euro area and periods of nonsustainable public debt. In the broader panel of industrial countries, the negative debt effect diminishes. Instead, debt will exert a positive impact on growth given that it is sustainable. This result is fairly robust and holds even for exogenous thresholds. While the relationship between debt and growth is subject to nonlinearities, the evidence suggests that the participation in monetary union might entail an additional risk for its members.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 38 (2013)
Issue (Month): PB ()
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Web page: http://www.elsevier.com/locate/inca/622617
Euro area debt crisis; Debt and growth; Sustainability of debt;
Other versions of this item:
- Christian Dreger & Hans-Eggert Reimers, 2012. "Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt?," Discussion Papers of DIW Berlin 1249, DIW Berlin, German Institute for Economic Research.
- Dreger, Christian & Reimers, Hans-Eggert, 2012. "Does euro area membership affect the relation between GDP growth and public debt?," Discussion Papers 327, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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