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Are there common structural determinants of potential output growth in Europe? An empirical exercise for 11 EMU countries

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  • Roberta De Santis
  • Piero Esposito
  • Elena Masi

Abstract

GDP growth in the Eurozone during the last twenty years continuously decreased. In addition, the global financial crisis and subsequent events seem to have, on average, shifted the trajectory of the Eurozone’s potential output downward. A key question is whether this trend is a permanent result of “secular stagnation” or if economic policies might improve the situation. In this paper, we test the impact of several structural determinants of potential output growth using a dynamic panel data methodology for 11 main EMU members for the period 1996-2014. We also take into account the role of fiscal policy stance and debt dynamics to assess whether European fiscal rules, especially in the aftermath of the financial and sovereign debt crises, contributed to the slowdown of potential growth. Estimated results suggest that population, tertiary education, research and development expenditure, trade and financial openness, and institutional quality contributed significantly to potential output growth in the EMU during the period under examination. We further find that debt accumulation affects positively and significantly potential growth for debt values up to 90% of GDP.

Suggested Citation

  • Roberta De Santis & Piero Esposito & Elena Masi, 2017. "Are there common structural determinants of potential output growth in Europe? An empirical exercise for 11 EMU countries," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.
  • Handle: RePEc:itt:wpaper:wp2017-4
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    Keywords

    Determinants of growth; potential output growth; reforms; institutional quality; fiscal rules; secular stagnation;

    JEL classification:

    • O29 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Other
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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