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The spending multiplier in a time of massive public debt : the euro area case

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Author Info

  • Radu Vranceanu

    ()
    (Economics Department - ESSEC Business School)

  • Damien Besancenot

    ()
    (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)

Abstract

This paper argues that in Euro-area economies, where the ECB cannot bail-out nancially distressed governments, the scal multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the period 1996-2011 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 e¤ectiveness of scal spending is adversely affected by the amount of public debt; for a debt-to-GDP ratio above 150% the impact on growth of the scal stimulus turns negative.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number hal-00728230.

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Date of creation: 02 Nov 2012
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Handle: RePEc:hal:journl:hal-00728230

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Keywords: Fiscal multiplier; Euro-area; Public debt; Illiquidity; the Great Recession;

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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. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  5. 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. 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.
  3. 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.

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