IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v52y2018i2d10.1007_s10614-017-9687-3.html
   My bibliography  Save this article

Debt Persistence in a Deflationary Environment: A Regime-Switching Model

Author

Listed:
  • Piero Ferri

    (University of Bergamo)

  • Fabio Tramontana

    (Catholic University, Milan)

Abstract

Debt dynamics have been a central theme of discussioins in the “Great Recession”. The aim of the present paper is to study the persistence of sovereign debt within a business cycle perspective. In order to achieve this result, a Keynesian framework is considered where aggregate demand fluctuations generate quantity adjustment within a deflationary environment. Furthermore a regime switching technique, capable of generating bounded and robust endogenous fluctuations, is introduced. The piecewise linearity of the model, along with its discontinuities, obliges to operate with a low dimensional system in order to obtain two analytical results: the robustness of bounded fluctuations, and hence of debt persistence, and the driving role of growth. These results are extended to higher dimensions by means of simulations. Also in this case, the effectiveness of policies is confirmed.

Suggested Citation

  • Piero Ferri & Fabio Tramontana, 2018. "Debt Persistence in a Deflationary Environment: A Regime-Switching Model," Computational Economics, Springer;Society for Computational Economics, vol. 52(2), pages 421-442, August.
    • Handle: RePEc:kap:compec:v:52:y:2018:i:2:d:10.1007_s10614-017-9687-3
    DOI: 10.1007/s10614-017-9687-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10614-017-9687-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10614-017-9687-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Herndon & Michael Ash & Robert Pollin, 2014. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 38(2), pages 257-279.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    3. Mr. Andrea Pescatori & Mr. Damiano Sandri & John Simon, 2014. "Debt and Growth: Is There a Magic Threshold?," IMF Working Papers 2014/034, International Monetary Fund.
    4. Olivier J. Blanchard & Daniel Leigh, 2013. "Growth Forecast Errors and Fiscal Multipliers," American Economic Review, American Economic Association, vol. 103(3), pages 117-120, May.
    5. repec:zbw:bofrdp:2014_004 is not listed on IDEAS
    6. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    7. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026212274x, December.
    8. Piero Ferri, 2016. "Aggregate Demand, Inequality and Instability," Books, Edward Elgar Publishing, number 17444.
    9. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
    10. Stefano Eusepi & Marc Giannoni & Bruce Preston, 2012. "Long-term debt pricing and monetary policy transmission under imperfect knowledge," Staff Reports 547, Federal Reserve Bank of New York.
    11. Benhabib, Jess & Evans, George W. & Honkapohja, Seppo, 2014. "Liquidity traps and expectation dynamics: Fiscal stimulus or fiscal austerity?," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 220-238.
    12. Mitra, Kaushik & Honkapohja, Seppo, 2014. "Targeting nominal GDP or prices: Guidance and expectation dynamics," Bank of Finland Research Discussion Papers 4/2014, Bank of Finland.
    13. D’Erasmo, P. & Mendoza, E.G. & Zhang, J., 2016. "What is a Sustainable Public Debt?," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2493-2597, Elsevier.
    14. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    15. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
    16. Doi, Takero & Hoshi, Takeo & Okimoto, Tatsuyoshi, 2011. "Japanese government debt and sustainability of fiscal policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 414-433.
    17. Ferri, Piero & Greenberg, Edward & Day, Richard H., 2001. "The Phillips curve, regime switching, and the NAIRU," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 23-37, September.
    18. Tramontana, F. & Gardini, L. & Ferri, P., 2010. "The dynamics of the NAIRU model with two switching regimes," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 681-695, April.
    19. Cochrane, John H., 2011. "Understanding policy in the great recession: Some unpleasant fiscal arithmetic," European Economic Review, Elsevier, vol. 55(1), pages 2-30, January.
    20. Thomas R. Michl, 2013. "Public debt, growth, and distribution," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(1), pages 120-144, January.
    21. Reda Cherif & Fuad Hasanov, 2018. "Public debt dynamics: the effects of austerity, inflation, and growth shocks," Empirical Economics, Springer, vol. 54(3), pages 1087-1105, May.
    22. Hall Robert E., 2014. "Fiscal Stability of High-Debt Nations under Volatile Economic Conditions," German Economic Review, De Gruyter, vol. 15(1), pages 4-22, February.
    23. Piero Ferri, 2011. "Macroeconomics of Growth Cycles and Financial Instability," Books, Edward Elgar Publishing, number 14260.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philipp Heimberger, 2021. "Do Higher Public Debt Levels Reduce Economic Growth?," wiiw Working Papers 211, The Vienna Institute for International Economic Studies, wiiw.
    2. Piero Ferri, 2011. "Macroeconomics of Growth Cycles and Financial Instability," Books, Edward Elgar Publishing, number 14260.
    3. İbrahim Özmen & Mihai Mutascu, 2024. "Public Debt and Growth: New Insights," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 8706-8736, June.
    4. Balázs Égert, 2015. "Public debt, economic growth and nonlinear effects: Myth or reality?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 226-238.
    5. De Vita, Glauco & Trachanas, Emmanouil & Luo, Yun, 2018. "Revisiting the bi-directional causality between debt and growth: Evidence from linear and nonlinear tests," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 55-74.
    6. Leeper, E.M. & Leith, C., 2016. "Understanding Inflation as a Joint Monetary–Fiscal Phenomenon," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2305-2415, Elsevier.
    7. Panizza, Ugo & Presbitero, Andrea F., 2014. "Public debt and economic growth: Is there a causal effect?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 21-41.
    8. Attard, Juergen, 2019. "Public Debt and Economic Growth nexus: A Dynamic Panel ARDL approach," MPRA Paper 96023, University Library of Munich, Germany.
    9. Nikolaos Antonakakis, 2014. "Sovereign Debt and Economic Growth Revisited: The Role of (Non-)Sustainable Debt Thresholds," Department of Economics Working Papers wuwp187, Vienna University of Economics and Business, Department of Economics.
    10. Suvra Prokash Mondal & Biswajit Maitra, 2021. "Assessing Growth Impact of Public Debt in Sri Lanka," Arthaniti: Journal of Economic Theory and Practice, , vol. 20(2), pages 201-226, December.
    11. Grobéty, Mathieu, 2018. "Government debt and growth: The role of liquidity," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 1-22.
    12. Roberto Martino & Phu Nguyen-Van, 2014. "Labour market regulation and fiscal parameters: A structural model for European regions," Working Papers of BETA 2014-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    13. Nicholas Oulton, 2013. "Medium and long run prospects for UK growth in the aftermath of the financial crisis," Discussion Papers 1307, Centre for Macroeconomics (CFM).
    14. Balẳ Égert, 2015. "The 90% public debt threshold: the rise and fall of a stylized fact," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3756-3770, July.
    15. Yannis Dafermos, 2015. "The ‘other half’ of the public debt–economic growth relationship: a note on Reinhart and Rogoff," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 12(1), pages 20-28, April.
    16. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    17. Alexander Chudik & M. Hashem Pesaran & Kamiar Mohaddes, 2020. "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR," Advances in Econometrics, in: Essays in Honor of Cheng Hsiao, volume 41, pages 143-189, Emerald Group Publishing Limited.
    18. Bitar, Nicholas & Chakrabarti, Avik & Zeaiter, Hussein, 2018. "Were Reinhart and Rogoff right?," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 614-620.
    19. Ruthira Naraidoo & Leroi Raputsoane, 2015. "Debt Sustainability and Financial Crises in South Africa," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(1), pages 224-233, January.
    20. Markus Eberhardt & Andrea Filippo Presbitero, 2013. "This Time They're Different: Heterogeneity;and Nonlinearity in the Relationship;between Debt and Growth," Mo.Fi.R. Working Papers 92, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

    More about this item

    Keywords

    Debt; Growth; Regime switching; Policies; Discontinuities;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:52:y:2018:i:2:d:10.1007_s10614-017-9687-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.