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

Author

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  • 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.

Suggested Citation

  • Costas Milas, 2014. "Financial Stress and the Impact of Public Debt on UK Growth in High versus Low-Growth Regimes: 1850-2013," Working Paper series 13_14, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:13_14
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    References listed on IDEAS

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    More about this item

    Keywords

    Debt; financial stress; GDP growth regimes;

    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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