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Government debt and macroeconomic activity: a predictive analysis for advanced economies

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  • Deniz Baglan
  • Emre Yoldas

Abstract

This paper explores the empirical relationship between government debt and future macroeconomic activity using data on twenty advanced economies throughout the post-war era. We use robust inference techniques to deal with the bias arising from the persistent nature of debt to GDP ratio as an endogenous predictor of GDP growth. Our results show that statistical significance of the coefficient on the debt ratio in predictive regressions changes considerably with the use of robust inference techniques. For countries with relatively low average debt ratios we find a negative threshold effect as their debt ratios increase toward moderate levels. For countries with chronically high debt ratios, GDP growth slows as relative government debt increases, but we find no significant threshold effect.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-05.

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Date of creation: 2013
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Handle: RePEc:fip:fedgfe:2013-05

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  1. Jesús Gonzalo & Michael Wolf, 2001. "Subsampling inference in threshold autoregressive models," Economics Working Papers 573, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Peter Phillips & Hyungsik Moon, 2000. "Nonstationary panel data analysis: an overview of some recent developments," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 263-286.
  3. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  4. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
  5. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
  6. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2010. "The future of public debt: prospects and implications," BIS Working Papers 300, Bank for International Settlements.
  7. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  8. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Debt Overhangs: Past and Present," NBER Working Papers 18015, National Bureau of Economic Research, Inc.
  9. Hjalmarsson, Erik, 2010. "Predicting Global Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(01), pages 49-80, February.
  10. Wolf, Michael, 2000. "Stock Returns and Dividend Yields Revisited: A New Way to Look at an Old Problem," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 18-30, January.
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Cited by:
  1. Balázs Égert, 2013. "The 90% public debt threshold: The rise and fall of a stylised fact," EconomiX Working Papers 2013-23, University of Paris West - Nanterre la Défense, EconomiX.
  2. Balazs Egert, 2013. "The 90% Public Debt Threshold: The Rise & Fall of a Stylised Fact," William Davidson Institute Working Papers Series wp1048, William Davidson Institute at the University of Michigan.

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