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The spending multiplier in a time of massive public debt : the euro area case

  • Vranceanu, Radu

    ()

    (ESSEC Business School)

  • Besancenot, Damien

    ()

    (University of Paris 13 and CEPN)

This paper argues that in Euro-area economies, where the ECB cannot bail-out …nancially distressed governments, the …scal multiplier is adversely a¤ected by the amount of public debt. A regression model on a panel of 26 EU countries over the period 1996-2011 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 e¤ectiveness of …scal spending is adversely a¤ected by the amount of public debt; for a debt-to-GDP ratio above 150% the impact on growth of the …scal stimulus turns negative.

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File URL: http://hal-essec.archives-ouvertes.fr/docs/00/75/19/14/PDF/WP1209.pdf
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Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number WP1209.

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Length: 13 pages
Date of creation: 11 Feb 2012
Date of revision: 11 Feb 2012
Handle: RePEc:ebg:essewp:dr-12009
Contact details of provider: Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
Web page: http://www.essec.edu/
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  1. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  2. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2012. "Debt and growth: new evidence for the euro area," Working Paper Series 1450, European Central Bank.
  3. Laura Jaramillo & Carlo Cottarelli, 2012. "Walking Hand in Hand; Fiscal Policy and Growth in Advanced Economies," IMF Working Papers 12/137, International Monetary Fund.
  4. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  5. Reinhart, Carmen M. & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  6. 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.
  7. 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.
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