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Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions

Proaño, Christian R. and Schoder, Christian and Semmler, Willi (2014) Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions. Department of Economics Working Paper Series, 167. WU Vienna University of Economics and Business, Vienna.

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Abstract

We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm. (authors' abstract)

Item Type: Paper
Keywords: financial stress / sovereign debt / economic growth / dynamic panel threshold regression
Classification Codes: JEL E20, G15, H63
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 18 Feb 2014 11:56
Last Modified: 18 Mar 2015 19:13
URI: http://epub.wu.ac.at/id/eprint/4085

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