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Public debt and economic growth: Economic systems matter

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  • Ahlborn, Markus
  • Schweickert, Rainer

Abstract

Most studies on the relationship between public debt and economic growth implicity assume homegenous debt effects across their samples. We - in accordance with recent literature - challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinacian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of hetergeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, whil for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.

Suggested Citation

  • Ahlborn, Markus & Schweickert, Rainer, 2015. "Public debt and economic growth: Economic systems matter," PFH Forschungspapiere/Research Papers 2015/02, PFH Private University of Applied Sciences, Göttingen.
  • Handle: RePEc:zbw:pfhrps:201502
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    References listed on IDEAS

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    More about this item

    Keywords

    Public Debt; Economic Growth; Economic Systems; Fiscal Policy; Welfare State;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • P10 - Economic Systems - - Capitalist Systems - - - General
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • H10 - Public Economics - - Structure and Scope of Government - - - General

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