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Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions

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  • Proaño, Christian R.
  • Schoder, Christian
  • Semmler, Willi

Abstract

We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.

Suggested Citation

  • Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 17-37.
  • Handle: RePEc:eee:jimfin:v:45:y:2014:i:c:p:17-37
    DOI: 10.1016/j.jimonfin.2014.02.005
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    Cited by:

    1. Lena Dräger & Christian R. Proaño, 2015. "Cross-Border Banking and Business Cycles in Asymmetric Currency Unions," Macroeconomics and Finance Series 201501, University of Hamburg, Department of Socioeconomics.
    2. Konstantin Makrelov & Channing Arndt & Rob Davies & Laurence Harris, 2018. "Fiscal multipliers in South Africa: The importance of financial sector dynamics," WIDER Working Paper Series 006, World Institute for Development Economic Research (UNU-WIDER).
    3. Schleer, Frauke & Semmler, Willi, 2015. "Financial sector and output dynamics in the euro area: Non-linearities reconsidered," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 235-263.
    4. Floro, Danvee & van Roye, Björn, 2017. "Threshold effects of financial stress on monetary policy rules: A panel data analysis," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 599-620.
    5. Brana, Sophie & Prat, Stéphanie, 2016. "The effects of global excess liquidity on emerging stock market returns: Evidence from a panel threshold model," Economic Modelling, Elsevier, vol. 52(PA), pages 26-34.
    6. Creel, Jérôme & Hubert, Paul & Labondance, Fabien, 2015. "Financial stability and economic performance," Economic Modelling, Elsevier, vol. 48(C), pages 25-40.
    7. repec:eme:isetez:s1571-038620150000024018 is not listed on IDEAS
    8. Mattia Guerini & Alessio Moneta & Mauro Napoletano & Andrea Roventini, 2017. "The Janus-faced nature of debt : result from a data-driven cointegrated SVAR approach," Documents de Travail de l'OFCE 2017-02, Observatoire Francais des Conjonctures Economiques (OFCE).
    9. repec:eee:streco:v:41:y:2017:i:c:p:29-42 is not listed on IDEAS
    10. S Coleman & K Sirichand, 2015. "Investigating Multiple Changes in Persistence in International Yields," Economic Issues Journal Articles, Economic Issues, vol. 20(1), pages 65-90, March.
    11. Nikolaos Antonakakis, 2014. "Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds," Department of Economics Working Papers wuwp187, Vienna University of Economics and Business, Department of Economics.
    12. Goldberg, Andrew & Romalis, John, 2015. "Public Debt and Growth in U.S. States," Working Papers 2015-10, University of Sydney, School of Economics.
    13. repec:gam:jecomi:v:6:y:2018:i:4:p:62-:d:185108 is not listed on IDEAS
    14. repec:bla:coecpo:v:35:y:2017:i:4:p:751-766 is not listed on IDEAS
    15. repec:spr:portec:v:16:y:2017:i:3:d:10.1007_s10258-017-0129-x is not listed on IDEAS
    16. Willi Semmler & Christian R. Proaño, 2015. "Escape Routes from Sovereign Default Risk in the Euro Area," International Symposia in Economic Theory and Econometrics,in: Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons, volume 24, pages 163-193 Emerald Publishing Ltd.

    More about this item

    Keywords

    Financial stress; Sovereign debt; Economic growth; Dynamic panel threshold regression;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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