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The spending multiplier in a time of massive public debt: The Euro-area case

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  • Radu Vranceanu
  • Damien Besancenot

Abstract

This article argues that in Euro-area economies, where the European Central Bank (ECB) cannot bail out financially distressed governments, the spending multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt; in particular, when the public debt exceeds 150% of GDP, the growth impact of the deficit might turn negative.

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File URL: http://hdl.handle.net/10.1080/13504851.2012.741674
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 20 (2013)
Issue (Month): 8 (May)
Pages: 758-762

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Handle: RePEc:taf:apeclt:v:20:y:2013:i:8:p:758-762

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
  2. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  3. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  4. Besancenot, Damien & Huynh, Kim & Vranceanu, Radu, 2004. "Default on sustainable public debt: illiquidity suspect convicted," Economics Letters, Elsevier, vol. 82(2), pages 205-211, February.
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Cited by:
  1. repec:spo:wpecon:info:hdl:2441/2g7mhju69b94obeaqlen09s1au is not listed on IDEAS
  2. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudre & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal consolidation in times of crisis: is the sooner really the better?," Sciences Po publications info:hdl:2441/2g7mhju69b9, Sciences Po.
  3. Caruntu Roxana Corina, 2013. "Public Debt: Structure And Characteristics Romania’S Case," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 3, pages 30-35, June.

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