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

Nikolaos Antonakakis

Publication: Working/Discussion PaperWU Working Paper

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

Publication series

SeriesDepartment of Economics Working Paper Series
Number187

WU Working Paper Series

  • Department of Economics Working Paper Series

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