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

  • Chang, Tsangyao

    ()

    (Feng Chia University, Taichung, Taiwan)

  • Chiang, Gengnan

    (Feng Chia University, Taichung, Taiwan.)

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.

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Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

Volume (Year): (2012)
Issue (Month): 2 (June)
Pages: 24-37

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Handle: RePEc:rjr:romjef:v::y:2012:i:2:p:24-37
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  1. Jansen, Eilev S & Terasvirta, Timo, 1996. "Testing Parameter Constancy and Super Exogeneity in Econometric Equations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 735-63, November.
  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  3. Fok, Dennis & van Dijk, Dick & Franses, Philip Hans, 2005. "Forecasting aggregates using panels of nonlinear time series," International Journal of Forecasting, Elsevier, vol. 21(4), pages 785-794.
  4. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
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  6. González, Andrés & Teräsvirta, Timo & van Dijk, Dick, 2005. "Panel Smooth Transition Regression Models," SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics.
  7. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
  8. Bruce E. Hansen, 1996. "Sample Splitting and Threshold Estimation," Boston College Working Papers in Economics 319., Boston College Department of Economics, revised 12 May 1998.
  9. Benjamin M. Friedman, 1985. "Crowding Out or Crowding In? Evidence on Debt-Equity Substitutability," NBER Working Papers 1565, National Bureau of Economic Research, Inc.
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