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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 22, Issue 1

Issues

Public debt and economic growth conundrum: nonlinearity and inter-temporal relationship

Vladimir ArčabićORCID iD: http://orcid.org/0000-0003-4173-8637 / Josip Tica
  • University of Zagreb, Department of Macroeconomics and Economic Development, Faculty of Economics and Business, Zagreb, Croatia
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Junsoo Lee
  • Department of Economics, Finance, and Legal Studies, University of Alabama, Tuscaloosa, AL, USA
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Robert J. Sonora
Published Online: 2018-02-13 | DOI: https://doi.org/10.1515/snde-2016-0086

Abstract

The influential paper by Reinhart and Rogoff (Reinhart, C. M., and K. S. Rogoff. 2010. “Growth in a Time of Debt.” The American Economic Review 100: 573–578.) has triggered a debate about the effects of the public debt on GDP growth. They argue that a debt-to-GDP ratio of over 90 percent has a deleterious effect on long-run economic growth. In this paper, we examine the inter-temporal relationship between public debt and GDP growth rates. We examine debt-to-GDP thresholds in nonlinear panel models, using various econometric strategies, methodologies, and data samples. We also evaluate confidence intervals around the estimated thresholds to determine the accuracy of estimated thresholds. Our results demonstrate that in the majority of estimated models, threshold values are not uniquely defined and the estimated coefficients are insignificant in most model specifications, as in Enders, Falk, and Siklos (Enders, W., B. L. Falk, and P. Siklos. 2007. “A Threshold Model of Real US GDP and the Problem of Constructing Confidence Intervals in TAR Models.” Studies in Nonlinear Dynamics & Econometrics 11: 1322.). Next, we examine the inter-temporal relationship between the public debt and economic growth using structural panel data models as well as reduced form panel VAR models. In contrast to the standard presumption in the literature, we find that the inter-temporal effect of economic growth on the public debt is strong, but the effect of the public debt on economic growth is weak. We find similar results in sub-samples that include countries where the public debt is over 90 percent of GDP.

This article offers supplementary material which is provided at the end of the article.

Keywords: economic growth; feedback effect; panel data model; public debt; threshold

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About the article

Published Online: 2018-02-13


Funding Source: European Social Fund

Award identifier / Grant number: SPIRITH

Funding Source: Hrvatska Zaklada za Znanost

Award identifier / Grant number: 7031

Financial support from European Social Fund (Funder Id: 10.13039/501100004895 and Grant Number: SPIRITH) and Hrvatska Zaklada za Znanost (Funder Id: 10.13039/501100004488 and Grant Number: 7031).


Citation Information: Studies in Nonlinear Dynamics & Econometrics, Volume 22, Issue 1, 20160086, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2016-0086.

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