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The Effect of Public Debt on Growth in Multiple Regimes in the Presence of Long-Memory and Non-Stationary Debt Series

Author

Listed:
  • Irina Syssoyeva-Masson

    (Department of Finance and Economics, University of Savoy Mont Blanc, France; Association CEMAFI International)

  • João de Sousa Andrade

    (CeBER and Faculty of Economics of the University of Coimbra)

Abstract

The study of the relationship between public debt and economic growth came again to the spotlight with the financial crisis (2007-2008) and with the sovereign debt crisis that followed in Europe. This literature aims to shed light about the sign, magnitude, mechanisms and threshold regimes relating debt to growth and to make policy recommendations with important consequences in terms of government’s policies. We empirically investigate this relationship for a group of 60 countries for a long-time period (the shorter one from 1970 to 2012) using the historical public debt database (HPDD) built by the International Monetary Fund (IMF) and we defend that the empirical strategy underlying most of the studies on this topic should be revised. We claim that: a) the study of the long-memory property of the public debt GDP ratio and stationarity (using the last generation tests) has to be performed as a first step of the empirical analysis, what has been done using 87 countries; b) In the presence of a non-stationary public debt GDP ratio cointegration analysis was used to estimate the relationship between the public debt GDP ratio and output; c) under the no rejection of the null of no cointegration, the above mentioned relationship was studied between the public debt GDP ratio first difference and GDP growth rate using threshold models and searching for thresholds using a wide variety of variables. The main conclusions of this study are that the debt series have a long memory and should not be analyzed in a short-term framework; additionally, the non-stationarity of the debt series does not allow researchers to apply stationary econometrics methods to model its behavior. This finding implies that the relationship between economic growth and national debt that has been characterizing the literature on the subject, has disputable econometric foundations. We thus recommend our empirical strategy to overcome the above-mentioned drawbacks of the existent empirical literature. Finally, it should be mentioned that the relationship between the public debt GDP ratio first difference and GDP growth rate is always negative despite the different threshold regimes identified.

Suggested Citation

  • Irina Syssoyeva-Masson & João de Sousa Andrade, 2017. "The Effect of Public Debt on Growth in Multiple Regimes in the Presence of Long-Memory and Non-Stationary Debt Series," CeBER Working Papers 2017-07, Centre for Business and Economics Research (CeBER), University of Coimbra.
    • Handle: RePEc:gmf:papers:2017-07
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    More about this item

    Keywords

    Public Debt; Growth; Long Memory; Stationary; Co-integration and Thresholds.;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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