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Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter?

Author

Listed:
  • Filip Ostrihoň
  • Mária Širaňová
  • Menbere Workie Tiruneh

Abstract

This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members’ growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals. JEL: F34, F43, H63.

Suggested Citation

  • Filip Ostrihoň & Mária Širaňová & Menbere Workie Tiruneh, 2023. "Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 70(1), pages 47-69.
    • Handle: RePEc:voj:journl:v:70:y:2023:i:1:p:47-69:id:688
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    More about this item

    Keywords

    Debt overhang; Debt threshold level; Panel data; Interaction effects; Quantile regression;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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