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

Christian R. Proaño, Christian Schoder, Willi Semmler

Publication: Working/Discussion PaperWU Working Paper

51 Downloads (Pure)

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)
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
DOIs
Publication statusPublished - 1 Feb 2014

Publication series

SeriesDepartment of Economics Working Paper Series
Number167

WU Working Paper Series

  • Department of Economics Working Paper Series

Cite this