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Transitional Behavior of Government Debt Ratio on Growth: The Case of OECD Countries

Author

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  • Chang, Tsangyao

    () (Feng Chia University, Taichung, Taiwan)

  • Chiang, Gengnan

    (Feng Chia University, Taichung, Taiwan.)

Abstract

We revisit how the government debt ratio and real GDP growth relationship varies with indebted levels and two macroeconomic control variables, unemployment rate and inflation rate, in a balanced panel of 19 OECD countries over the period 1993-2007, after the signing of the EU Treaty in Maastricht on February 7, 1992. The empirical results indicate that there is one threshold value of 97.82%, which divides our sample into two regimes. The mean of the real GDP growth rates in the left regime is 1.16% higher than that in the right regime. The significantly positive marginal effects of government debt ratio on real GDP growth in both left and right regimes are consistent with the stimulus view (Eisner, 1992). Neither “debt overhang” nor “debt irrelevance” exists in these OECD countries. Our findings also show that there is a significantly negative marginal effect of unemployment rate on real GDP growth in the left regime, but significantly positive in the right regime. This positive nexus between the unemployment rate and real GDP growth in the right regime is inconsistent with Okun’s Law. Meanwhile, there is a significantly negative impact of inflation rate on real GDP growth in the left regime, but non-significantly negative in the right regime. The transitional behavior from the right to the left regime in Belgium in 2006 and in Canada in 1998 is good example for the highly indebted countries, such as Italy and Japan. Therefore, our empirical findings have important implications for fiscal policymakers, not only in these OECD countries but also in the rest of world.

Suggested Citation

  • Chang, Tsangyao & Chiang, Gengnan, 2012. "Transitional Behavior of Government Debt Ratio on Growth: The Case of OECD Countries," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 24-37, June.
  • Handle: RePEc:rjr:romjef:v::y:2012:i:2:p:24-37
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    References listed on IDEAS

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    1. Barro, Robert J, 1989. "The Ricardian Approach to Budget Deficits," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 37-54, Spring.
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    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
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    Cited by:

    1. repec:bla:scotjp:v:64:y:2017:i:4:p:349-375 is not listed on IDEAS
    2. Juergen Amann & Paul Middleditch, 2017. "Growth in a time of austerity: evidence from the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(4), pages 349-375, September.
    3. repec:mes:emfitr:v:51:y:2015:i:1:p:224-233 is not listed on IDEAS
    4. Ruthira Naraidoo & Leroi Raputsoane, 2013. "Debt sustainability and financial crises in South Africa," Working Papers 201352, University of Pretoria, Department of Economics.
    5. repec:ers:journl:v:xx:y:2017:i:2a:p:607-633 is not listed on IDEAS
    6. Hemantha Kumara & Nawalage S. Cooray, 2013. "Public Debt and Economic Growth in Sri Lanka: Is There Any Threshold Level for Pubic Debt?," Working Papers EMS_2013_22, Research Institute, International University of Japan.

    More about this item

    Keywords

    real GDP growth; government debt ratio; unemployment rate; inflation rate; debt overhang; debt irrelevance; stimulus view; Okun’s Law; panel Smooth Transition Regression model; OECD countries;

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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