IDEAS home Printed from https://ideas.repec.org/p/tkk/dpaper/dp88.html
   My bibliography  Save this paper

Public debt is always toxic to economic growth

Author

Listed:
  • Juhana Hukkinen

    (Bank of Finland)

  • Matti Viren

    (Bank of Finland and Department of Economics, University of Turku)

Abstract

This paper deals with the debt-growth relationship using several time-series tools. The idea is to find out whether the inverse relationship between these variable can be detected without imposing any functional forms for the estimating relationship and whether the relationship does indeed reflect some nonlinear features. Thus recursive correlations with different orderings of the time-series are computed using the Reinhart and Rogoff panel data. After that, recursive correlations are re-estimated with data that are cyclically adjusted to reflect the structural features of these two variables. The nature of the relationship is also scrutinized by using various variable-parameter estimation techniques (Kalman Filter, Logistic functional form and recursive estimation). Finally, some analyses of causality are carried out using these (filtered) data. The analysis clearly shows that the inverse relationship is very robust indeed and it rather supports the ``toxic debt'' hypothesis than the cyclical debt accumulation hypothesis.

Suggested Citation

  • Juhana Hukkinen & Matti Viren, 2013. "Public debt is always toxic to economic growth," Discussion Papers 88, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp88
    as

    Download full text from publisher

    File URL: http://ace-economics.fi/kuvat/dp88.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Thomas Herndon & Michael Ash & Robert Pollin, 2014. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 38(2), pages 257-279.
    2. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    4. James Tobin, 1965. "The Burden Of The Public Debt: A Review Article," Journal of Finance, American Finance Association, vol. 20(4), pages 679-682, December.
    5. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
    6. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ikonen, Pasi, 2017. "Financial depth, debt, and growth," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e51, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rosati Dariusz K., 2017. "Asymmetric Shocks in the Euro Area: Convergence or Divergence?," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 53(3), pages 7-25, September.
    2. Vaca Medina, Gustavo & Vaca, Jesús & Mora Pérez, César Omar, 2020. "The impact of public debt on economic growth: an empirical study of Mexico (1994–2016)," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    3. Salma Slimani, 2016. "Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries," International Journal of Business and Social Research, LAR Center Press, vol. 6(3), pages 20-37, March.
    4. Cuong Le Van & Phu Nguyen‐Van & Amélie Barbier‐Gauchard & Duc‐Anh Le, 2019. "Government expenditure, external and domestic public debt, and economic growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 21(1), pages 116-134, February.
    5. Augustin, Patrick & Sokolovski, Valeri & Subrahmanyam, Marti G. & Tomio, Davide, 2022. "In sickness and in debt: The COVID-19 impact on sovereign credit risk," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1251-1274.
    6. Salma Slimani, 2016. "Threshold Effects of Fiscal Policy on Economic Activity in Developing Countries," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 6(3), pages 20-37, March.
    7. Ikonen, Pasi, 2017. "Financial depth, debt, and growth," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e51, July.
    8. Michael A. Clemens, 2017. "The Meaning Of Failed Replications: A Review And Proposal," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 326-342, February.
    9. Séverine MENGUY, 2019. "Does public indebtedness constrain or can it favor economic growth? A simple analytical modeling," Bulletin of Applied Economics, Risk Market Journals, vol. 6(2), pages 1-29.
    10. Roberto Martino & Phu Nguyen-Van, 2014. "Labour market regulation and fiscal parameters: A structural model for European regions," Working Papers of BETA 2014-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    11. İbrahim Özmen & Mihai Mutascu, 2024. "Public Debt and Growth: New Insights," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8706-8736, June.
    12. Janice Boucher Breuer & John McDermott, 2019. "Debt And Depression," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 714-730, October.
    13. Magdalena Osińska & Tadeusz Kufel & Marcin Błażejowski & Paweł Kufel, 2020. "Modeling mechanism of economic growth using threshold autoregression models," Empirical Economics, Springer, vol. 58(3), pages 1381-1430, March.
    14. repec:spo:wpmain:info:hdl:2441/3l2vounfl99nvqsr0k24sn3k5l is not listed on IDEAS
    15. Dias, Daniel A. & Richmond, Christine & Wright, Mark L.J., 2014. "The stock of external sovereign debt: Can we take the data at ‘face value’?," Journal of International Economics, Elsevier, vol. 94(1), pages 1-17.
    16. Gärtner, Manfred & Griesbach, Björn & Mennillo, Giulia, 2013. "The near-death experience of the Celtic Tiger: a model-driven narrative from the European sovereign debt crisis," Economics Working Paper Series 1321, University of St. Gallen, School of Economics and Political Science.
    17. Nick Huntington‐Klein & Andreu Arenas & Emily Beam & Marco Bertoni & Jeffrey R. Bloem & Pralhad Burli & Naibin Chen & Paul Grieco & Godwin Ekpe & Todd Pugatch & Martin Saavedra & Yaniv Stopnitzky, 2021. "The influence of hidden researcher decisions in applied microeconomics," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 944-960, July.
    18. Calderon,Cesar & Nguyen,Ha Minh, 2015. "Do capital inflows boost growth in developing countries ? evidence from Sub-Saharan Africa," Policy Research Working Paper Series 7298, The World Bank.
    19. Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 17-37.
    20. Balázs Égert, 2015. "Public debt, economic growth and nonlinear effects: Myth or reality?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 226-238.
    21. Nicholas Oulton, 2013. "Medium and long run prospects for UK growth in the aftermath of the financial crisis," Discussion Papers 1307, Centre for Macroeconomics (CFM).

    More about this item

    Keywords

    debt; government deficit; growth; causality;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tkk:dpaper:dp88. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Susmita Baulia (email available below). General contact details of provider: https://edirc.repec.org/data/tukkkfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.