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Debt Overhang in the Eurozone: A Spatial Panel Analysis

  • Romero, Alfredo A.

    (North Carolina A&T State University)

  • Burkey, Mark L.

    (North Carolina A&T State University)

The debt overhang hypothesis suggests that high debt levels retard prospects for GDP growth. We investigate the impact that debt overhang has had on recent GDP growth in the Eurozone, paying particular attention to the spillover effects that debt has on neighboring countries. We argue that in the Eurozone spatial effects are of crucial importance in modeling regional GDP growth, and find that a Spatial Durbin model is appropriate. We find strong evidence for the debt overhang hypothesis, confirming a concave relationship that has been found in other studies where low levels of debt can have a positive impact on GDP, but at some level a “turning point” occurs. The present study finds that this turning point occurs at a lower Debt/GDP ratio than prior studies, and separates out the direct and indirect (spillover) effects on neighboring countries’ GDPs.

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Article provided by Southern Regional Science Association in its journal Review of Regional Studies.

Volume (Year): 41 (2011)
Issue (Month): 1 (Summer)
Pages: 49-63

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Handle: RePEc:rre:publsh:v:41:y:2011:i:1:p:49-63
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  1. Reinhart, Carmen M. & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
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  3. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  4. Imbs, Jean & Ranciere, Romain, 2005. "The overhang hangover," Policy Research Working Paper Series 3673, The World Bank.
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  8. Göran Therborn & K.C. Ho, 2009. "Introduction," City, Taylor & Francis Journals, vol. 13(1), pages 53-62, March.
  9. Jeremy Bulow & Kenneth Rogoff, 1989. "Sovereign Debt Repurchases: No Cure for Overhang," NBER Working Papers 2850, National Bureau of Economic Research, Inc.
  10. Chowdhury, Abdur R., 2001. "The Impact of Financial Reform on Private Savings in Bangladesh," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Sen, Swapan & Kasibhatla, Krishna M. & Stewart, David B., 2007. "Debt overhang and economic growth-the Asian and the Latin American experiences," Economic Systems, Elsevier, vol. 31(1), pages 3-11, March.
  12. J. Barkley Rosser, 2009. "Introduction," Chapters, in: Handbook of Research on Complexity, chapter 1 Edward Elgar Publishing.
  13. repec:spr:pharme:v:22:y:2004:i:4:p:225-244 is not listed on IDEAS
  14. Siti Daud & Jan Podivinsky, 2011. "Debt–Growth Nexus: A Spatial Econometrics Approach for Developing Countries," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(1), pages 1-15, September.
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