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Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds

Antonakakis, Nikolaos (2014) Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds. Department of Economics Working Paper Series, 187. WU Vienna University of Economics and Business, Vienna.

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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. (author's abstract)

Item Type: Paper
Keywords: Government debt / growth / sustainability / threshold / government budget constraint / öffentliche Schulden / Nachhaltigkeit /Wirtschaftswachstum / Fiskalpolitik / Haushaltskürzung
Classification Codes: RVK QL 799, QC 340 ; JEL C23, E62, F43, H63, O40
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 15 Oct 2014 09:21
Last Modified: 13 Jan 2016 09:49
URI: http://epub.wu.ac.at/id/eprint/4321

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