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Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries

Author

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  • De Santis, Roberta

    (ISTAT-LUISS)

  • Esposito, Piero

    (LUISS School of European Political Economy)

  • Masi, Elena

    (MEF-­DT)

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 intend to 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. By estimating a quadratic relation between debt and potential growth, we find that negative effects dominate for values above 132%; however, the impact of public debt is statistically uncertain even for levels slightly below 100%. Once debt dynamics are taken into account, we find that excessive and prolonged consolidation, measured using the cyclically adjusted primary balance, might have, at best, no effect on potential growth when debt levels do not exceed the threshold level.

Suggested Citation

  • De Santis, Roberta & Esposito, Piero & Masi, Elena, 2017. "Are There Common Structural Determinants of Potential Output Growth in Europe?: An empirical exercise for 11 EMU countries," SEP Working Papers 2017/4, LUISS School of European Political Economy.
  • Handle: RePEc:ris:sepewp:2017_004
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    More about this item

    Keywords

    determinants of growth; potential output growth; reforms;
    All these keywords.

    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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