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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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    2. Creel, Jérôme & Hubert, Paul & Labondance, Fabien, 2015. "Financial stability and economic performance," Economic Modelling, Elsevier, vol. 48(C), pages 25-40.
    3. Christian Proano & Christian Schoder & Willi Semmler, 2013. "The Role of Financial Stress in Debt and Recovery," SCEPA policy note series. 2012-02, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    4. Jérôme Creel & Paul Hubert & Fabien Labondance, 2015. "Financial stability and economic performance in Europe," Sciences Po publications info:hdl:2441/5euk7d0f8t8, Sciences Po.
    5. repec:hal:spmain:info:hdl:2441/5euk7d0f8t81prfu1k2sspdcok is not listed on IDEAS
    6. repec:hal:wpspec:info:hdl:2441/f6h8764enu2lskk9p5296ie95 is not listed on IDEAS
    7. repec:hal:spmain:info:hdl:2441/f6h8764enu2lskk9p5296ie95 is not listed on IDEAS
    8. Khazalipoor , Nasrin & Ranjbar , Homayoun, 2014. "The Impact of Financial Stress on Iran per Capita GDP over the Period 2000(3)-2011(1)," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 9(2), pages 117-137, October.

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    More about this item

    Keywords

    financial stress; sovereign debt; non-linear econometrics; threshold regression; thresh- old panel regression;
    All these keywords.

    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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