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The Role of Government Debt in Economic Growth

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  • Antonio Afonso

    (University of Lisbon)

  • Jose Alves

    (University of Lisbon)

Abstract

We study the effect of public debt on economic growth for annual and 5-year average growth rates, as well as the existence of non-linearity effects of debt on growth for 14 European countries from 1970 until 2012. We also consider debt-to-GDP ratio interactions with various subsets of monetary, public finance, institutional and macroeconomic variables. Our results show a maximum negative impact of around –0.04% and –0.03% for each 1% increment of public debt, for annual and 5-year average growth rates, respectively. In addition, we find average debt ratio thresholds of around 75%. Belonging to the Eurozone has a detrimental effect of at least –0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth

Suggested Citation

  • Antonio Afonso & Jose Alves, 2015. "The Role of Government Debt in Economic Growth," Hacienda Pública Española / Review of Public Economics, IEF, vol. 215(4), pages 9-26, December.
    • Handle: RePEc:hpe:journl:y:2015:v:215:i:4:p:9-26
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    More about this item

    Keywords

    government debt; economic growth; debt thresholds;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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