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Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Nonlinear Dynamic Panels

Author

Listed:
  • Christian R. Proaño

    () (Department of Economics, New School for Social Research)

  • Christian Schoder

    (Macroeconomic Policy Institute (IMK))

  • Willi Semmler

    (Department of Economics, New School for Social Research)

Abstract

We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the state of the financial market. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifi- cations from the financial sector. For thirteen industrialized economies we study empirically the relationship between the GDP-growth rate, the debt-GDP ratio, and the financial stress index for the period 1980-2010 using quarterly data and dynamic single-country and dynamic panel threshold regression methods. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.

Suggested Citation

  • Christian R. Proaño & Christian Schoder & Willi Semmler, 2013. "Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Nonlinear Dynamic Panels," Working Papers 1304, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1304
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    File URL: http://www.economicpolicyresearch.org/econ/2013/NSSR_WP_042013.pdf
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    References listed on IDEAS

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    Cited by:

    1. Christian Proano & Christian Schoder & Willi Semmler, 2013. "The Role of Financial Stress in Debt and Recovery," SCEPA policy note series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2012-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    2. Creel, Jérôme & Hubert, Paul & Labondance, Fabien, 2015. "Financial stability and economic performance," Economic Modelling, Elsevier, vol. 48(C), pages 25-40.
    3. Jérôme Creel & Paul Hubert & Fabien Labondance, 2015. "Financial stability and economic performance in Europe," Sciences Po publications info:hdl:2441/5euk7d0f8t8, Sciences Po.

    More about this item

    Keywords

    financial stress; sovereign debt; non-linear econometrics; threshold regression; thresh- old panel regression;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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