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Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt?

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  • Christian Dreger
  • Hans-Eggert Reimers

Abstract

We analyse the relationship between the debt to GDP ratio and real per capita GDP growth for the euro area members by distinguishing between periods of sustainable and non-sustainable debt. Thresholds are theory-based and depend on the macroeconomic framework. If the interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable debt ratio. The negative impact of the debt to GDP ratio is particularly strong for non sustainable ratios and especially relevant for the euro area. This suggests that the participation in monetary union might entail an additional risk for its members.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.409660.de/dp1249.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1249.

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Length: 13 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1249

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Keywords: Euro area debt crisis; debt sustainability;

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  1. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
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Cited by:
  1. Reimers, Hans-Eggert, 2013. "Remarks on the euro crisis," Wismar Discussion Papers 05/2013, Hochschule Wismar, Wismar Business School.

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