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

Author

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  • Baglan Deniz

    (Howard University – Department of Economics, 2400 Sixth Street, N.W. Washington, DC 20059, USA)

  • Yoldas Emre

    (Federal Reserve Board, 20th and C Streets NW, Washington, DC 20551, USA)

Abstract

Using post-war data on advanced economies, we find that a higher public debt ratio predicts marginally slower GDP growth under the assumption of a linear relationship. This result is robust to strong persistence in debt ratio, which may cause finite sample bias in estimation and inference. In the nonlinear framework, we find only weak support for piece-wise linear models that explicitly incorporate the idea of a debt tipping point. The threshold estimates from such models are subject to a high level of uncertainty and are sensitive to assumptions on minimum number of observations in each regime. However, using a flexible semiparametric model we uncover that the predictive function is highly complex and behaves quite differently at low, intermediate and high levels of debt. Of particular interest to the recent debate on effects of higher public indebtedness on growth, we find that average annual GDP growth gradually declines by about 0.5% as debt ratio climbs from about 75% to 100%, with most of the effect taking place over the 85–95% range.

Suggested Citation

  • Baglan Deniz & Yoldas Emre, 2016. "Public debt and macroeconomic activity: a predictive analysis for advanced economies," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(3), pages 301-324, June.
    • Handle: RePEc:bpj:sndecm:v:20:y:2016:i:3:p:301-324:n:2
    DOI: 10.1515/snde-2014-0075
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    References listed on IDEAS

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    Cited by:

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    2. Yun Jung Kim & Jing Zhang, 2021. "The Relationship Between Debt and Output," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 230-257, March.
    3. Larissa Batrancea, 2020. "The Influence of Public Debt on Performance: Lesson from Romanian Counties," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 809-814, December.
    4. Guo, Minjie & McDermott, John, 2020. "Sovereign debt and the length of economic depressions," Economic Modelling, Elsevier, vol. 90(C), pages 79-91.
    5. Malte Rengel, 2020. "Sustainability of European fiscal balances: Just a statistical artifact?," Empirical Economics, Springer, vol. 58(4), pages 1681-1712, April.
    6. Janice Boucher Breuer & John McDermott, 2019. "Debt And Depression," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 714-730, October.

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