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Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions

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)

Identiferoai:union.ndltd.org:VIENNA/oai:epub.wu-wien.ac.at:4522
Date05 March 2014
CreatorsProaño, Christian R., Schoder, Christian, Semmler, Willi
PublisherElsevier
Source SetsWirtschaftsuniversität Wien
LanguageEnglish
Detected LanguageEnglish
TypeArticle, PeerReviewed
Formatapplication/pdf
Relationhttp://dx.doi.org/10.1016/j.jimonfin.2014.02.005, http://www.sciencedirect.com/science/article/pii/S0261560614000308, http://epub.wu.ac.at/4522/

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