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Public debt and economic growth: Is there a causal effect?

  • Panizza, Ugo

    ()

  • Presbitero, Andrea F.

    ()

This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.

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File URL: http://polis.unipmn.it/pubbl/RePEc/uca/ucapdv/panizza198.pdf
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Paper provided by Institute of Public Policy and Public Choice - POLIS in its series POLIS Working Papers with number 168.

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Length: 49 pages
Date of creation: Apr 2012
Handle: RePEc:uca:ucapdv:168
Contact details of provider: Web page: http://polis.unipmn.it

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