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Role of Uncertainty in Debt-Growth Nexus

Author

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  • Mindaugas Butkus
  • Diana Cibulskiene
  • Lina Garsviene
  • Janina Seputiene

Abstract

This paper analyses uncertainty as one of the factors that affect the public debt-growth nexus. We put forward a hypothesis that uncertainty mediates the effect of public debt on economic growth. The empirical examination of the mediating effect is based on the neoclassical growth equation and consistent with specifications previously used to analyse the sources of heterogeneity in the debt-growth relationship. Since one part of the uncertainty is financial risk, which is closely related to the financial sector stability, we use interest rate spread as a main variable, and the risk premium on lending as an alternative one to proxy financial risk and thus, to some extent, uncertainty. Our results show that lower uncertainty is related to a bigger positive effect of debt on growth and a higher turning point in the debt-growth nexus. On the contrary, higher uncertainty leads to a lower positive and more considerable negative effect of debt on growth in both linear and quadratic specifications.

Suggested Citation

  • Mindaugas Butkus & Diana Cibulskiene & Lina Garsviene & Janina Seputiene, 2022. "Role of Uncertainty in Debt-Growth Nexus," Prague Economic Papers, Prague University of Economics and Business, vol. 2022(1), pages 58-78.
    • Handle: RePEc:prg:jnlpep:v:2022:y:2022:i:1:id:790:p:58-78
    DOI: 10.18267/j.pep.790
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    More about this item

    Keywords

    Debt-growth nexus; uncertainty; interest rate spread; risk premium; financial risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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