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Financial Stress and the Impact of Public Debt on UK Growth in High versus Low-Growth Regimes: 1850-2013

Author Info

  • Costas Milas

    ()

    (University of Liverpool, UK; Rimini Centre of Economic Analysis, Italy)

Abstract

Using a long historical dataset, we estimate a Threshold Vector Autoregression (T-VAR) model for the UK based on a financial stress measure, the debt-to-GDP ratio, borrowing costs and real GDP growth. Our model allows for the impact of debt/GDP to vary between periods of high and low economic growth. We find that financial stress depresses growth much more in the low as opposed to the high-growth regime. We also find that positive shocks to debt/GDP depress economic growth and raise borrowing costs; again, the impact is much stronger when growth is low. This is an important finding as economists and policy-makers are currently debating whether it makes sense to proceed swiftly with fiscal consolidation when economic conditions remain weak.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 13_14.

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Date of creation: Apr 2014
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Handle: RePEc:rim:rimwps:13_14
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Keywords: Debt; financial stress; GDP growth regimes;

Find related papers by JEL classification:

  • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
  • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
  • H6 - Public Economics - - National Budget, Deficit, and Debt

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  1. Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2013. "Measuring financial stress in transition economies," Journal of Financial Stability, Elsevier, vol. 9(4), pages 597-611.
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  13. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
  14. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
  15. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, March.
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