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Debt and convergence: Evidence from the EU member states

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  • Rant, Vasja
  • Marinč, Matej
  • Porenta, Jan

Abstract

We look at the effects of indebtedness on convergence among the EU member states. Higher total, public, and private debt ratios are associated with slower rates of convergence. The estimated convergence slowdown is stronger for public debt compared to private debt. This disparity could reflect inefficiencies and crowding out effects of government debt. It could also reflect the possibility that higher public debt ratios exacerbate the effects of private debt on convergence during financial crises because they constrain the governments’ ability to pursue stabilization policies. Implied rates of convergence show that convergence may stop at very high debt levels.

Suggested Citation

  • Rant, Vasja & Marinč, Matej & Porenta, Jan, 2021. "Debt and convergence: Evidence from the EU member states," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319313467
    DOI: 10.1016/j.frl.2020.101617
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    More about this item

    Keywords

    Public debt; Private debt; Convergence; Economic growth; Financial development;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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