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Public debt and economic growth: Is there a causal effect?

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  • Panizza, Ugo

    ()

  • Presbitero, Andrea F.

    ()

Abstract

This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.

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File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/panizza198.pdf
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Bibliographic Info

Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 168.

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Length: 49 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:uca:ucapdv:168

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Web page: http://polis.unipmn.it

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Keywords: Government Debt; Growth; OECD countries;

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References

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  1. Ugo Panizza & Dany Jaimovich, 2007. "Procyclicality or Reverse Causality?," Research Department Publications 4508, Inter-American Development Bank, Research Department.
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  3. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research.
  4. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2010. "Debt Overhang or Debt Irrelevance?," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 1-24, April.
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  7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  8. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
  9. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  10. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2000. "Emerging Equity Markets and Economic Development," NBER Working Papers 7763, National Bureau of Economic Research, Inc.
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  12. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  13. Andrea Filippo Presbitero, 2010. "Total public debt and growth in developing countries," Mo.Fi.R. Working Papers 44, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  14. Hausman, Jerry A & Newey, Whitney K & Taylor, William E, 1987. "Efficient Estimation and Identification of Simultaneous Equation Models with Covariance Restrictions," Econometrica, Econometric Society, vol. 55(4), pages 849-74, July.
  15. Ricardo Hausmann & Ugo Panizza, 2011. "Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium," Journal of Globalization and Development, De Gruyter, vol. 2(1), pages 4.
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  22. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
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  24. Andrew Powell, 2012. "The World of Forking Paths: Latin America and the Caribbean Facing Global Economic Risks," Research Department Publications 4766, Inter-American Development Bank, Research Department.
  25. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Korrelation zwischen Verschuldung und Wirtschaftswachstum
    by Acemaxx-Analytics in Acemaxx-Analytics on 2012-04-23 13:09:00
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    by ? in slon on 2012-04-23 21:01:00
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    by Alberto Bagnai in Goofynomics on 2012-07-05 17:58:00
  4. OSSERVATORIO "PUDE" 2. CRONACHE DI UN CETRIOLO ANNUNCIATO-2
    by Quarantotto in Orizzonte48 on 2013-02-25 11:37:00
  5. OSSERVATORIO PUDE 5. CRONACHE DI UN CETRIOLO ANNUNCIATO.
    by Quarantotto in Orizzonte48 on 2013-03-06 11:00:00
  6. UN "ESTREMO" APPELLO A VALERIO ONIDA E GUSTAVO ZAGRELBESKY
    by Quarantotto in Orizzonte48 on 2013-03-25 12:21:00
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Cited by:
  1. Andros Kourtellos & Thanasis Stengos & Chih Ming Tan, 2012. "The Effect of Public Debt on Growth in Multiple Regimes," Working Papers 1210, University of Guelph, Department of Economics.
  2. Balazs Egert, 2013. "Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality," CESifo Working Paper Series 4157, CESifo Group Munich.

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  1. Crisi economica del 2008-2013 in Wikipedia (Italian)

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