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Public Debt and Economic Growth: Is There a Causal Effect?

  • Ugo Panizza

    ()

    (UNCTAD and The Graduate Institute, Geneva)

  • Andrea Filippo Presbitero

    ()

    (Universit… Politecnica delle Marche, MoFiR)

This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.

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Paper provided by Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences in its series Mo.Fi.R. Working Papers with number 65.

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Length: 48
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:anc:wmofir:65
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