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The spending multiplier in a time of massive public debt: The Euro-area case

  • Radu Vranceanu
  • Damien Besancenot

This article argues that in Euro-area economies, where the European Central Bank (ECB) cannot bail out financially distressed governments, the spending multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt; in particular, when the public debt exceeds 150% of GDP, the growth impact of the deficit might turn negative.

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File URL: http://hdl.handle.net/10.1080/13504851.2012.741674
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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 20 (2013)
Issue (Month): 8 (May)
Pages: 758-762

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Handle: RePEc:taf:apeclt:v:20:y:2013:i:8:p:758-762
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  1. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  2. Checherita-Westphal, Cristina & Rother, Philipp, 2012. "The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area," European Economic Review, Elsevier, vol. 56(7), pages 1392-1405.
  3. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013. "Debt and growth: New evidence for the euro area," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 809-821.
  4. Laura Jaramillo & Carlo Cottarelli, 2012. "Walking Hand in Hand; Fiscal Policy and Growth in Advanced Economies," IMF Working Papers 12/137, International Monetary Fund.
  5. Besancenot, Damien & Huynh, Kim & Vranceanu, Radu, 2004. "Default on sustainable public debt: illiquidity suspect convicted," Economics Letters, Elsevier, vol. 82(2), pages 205-211, February.
  6. Robert E. Hall, 2009. "By How Much Does GDP Rise If the Government Buys More Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 183-249.
  7. 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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