Working papers, Department of Economics, WU (Wirtschaftsuniversität Wien)
Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds
Abstract: Contributing to the contentious debate on the relationship
between sovereign debt and economic growth, I examine the role of
theory-driven (non-)sustainable debt-ratios in combination with debt-ratio
thresholds on economic growth. Based on both dynamic and non-dynamic panel
data analyses in the euro area (EA) 12 countries over the period 1970-2013,
I find that non-sustainable debt-ratios above and below the 60% threshold,
have a detrimental effect on short-run economic growth, while sustainable
debt-ratios below the 90% threshold exert a positive influence on short-run
economic growth. In the long-run, both non-sustainable and sustainable
debt-ratios above the 90% threshold, as well as non-sustainable debt-ratios
below the 60% compromise economic growth. Robustness analysis supports
these findings, and provides additional evidence of a positive effect of
sustainable debt-ratios below the 60% threshold, as predicated by the
Maastricht Treaty criterion, on (short- and long-run) economic growth.
Overall, these results suggest that debt sustainability in addition to debt
non-linearities should be considered simultaneously in the debt-growth
nexus. In addition, the results indicate the importance of a timely
reaction of fiscal policy in countries with non-sustainable debts, as
implied by fiscal rules, in an attempt to ensure fiscal sustainability and,
ultimately, promote long-run economic growth.
Keywords: Government debt, growth, sustainability, threshold, government budget constraint; (follow links to similar papers)
JEL-Codes: C23,; E62,; F43,; H63,; O40; (follow links to similar papers)
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