Financial stress,sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions |
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Institution: | 1. Universitat Pompeu Fabra, Carrer de Ramon Trias Fargas, 25-27, 08005 Barcelona, Spain;2. Banco de España, Spain;3. Princeton University, USA;4. NBER, United States;5. ICREA-Universitat Pompeu Fabra, Spain;6. Barcelona GSE, Spain;7. CREI, Spain;8. Imperial College London, United Kingdom;9. CEPR, UK |
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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. |
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Keywords: | Financial stress Sovereign debt Economic growth Dynamic panel threshold regression E20 G15 H63 |
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