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

  • Radu Vranceanu

    ()

    (Economics Department - ESSEC Business School)

  • Damien Besancenot

    ()

    (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)

This paper argues that in Euro-area economies, where the ECB cannot bail-out nancially distressed governments, the scal multiplier is adversely affected 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 affected 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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Paper provided by HAL in its series Post-Print with number hal-00728230.

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Date of creation: 02 Nov 2012
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Handle: RePEc:hal:journl:hal-00728230
Note: View the original document on HAL open archive server: http://hal-essec.archives-ouvertes.fr/hal-00728230
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  1. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  2. 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.
  3. 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.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
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