Financial Stress and the Impact of Public Debt on UK Growth in High versus Low-Growth Regimes: 1850-2013
AbstractUsing a long historical dataset, we estimate a Threshold Vector Autoregression (T-VAR) model for the UK based on a financial stress measure, the debt-to-GDP ratio, borrowing costs and real GDP growth. Our model allows for the impact of debt/GDP to vary between periods of high and low economic growth. We find that financial stress depresses growth much more in the low as opposed to the high-growth regime. We also find that positive shocks to debt/GDP depress economic growth and raise borrowing costs; again, the impact is much stronger when growth is low. This is an important finding as economists and policy-makers are currently debating whether it makes sense to proceed swiftly with fiscal consolidation when economic conditions remain weak.
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Bibliographic InfoPaper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 13_14.
Date of creation: Apr 2014
Date of revision:
Debt; financial stress; GDP growth regimes;
Find related papers by JEL classification:
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- H6 - Public Economics - - National Budget, Deficit, and Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-05-17 (All new papers)
- NEP-FDG-2014-05-17 (Financial Development & Growth)
- NEP-GRO-2014-05-17 (Economic Growth)
- NEP-PBE-2014-05-17 (Public Economics)
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