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Investigating the presence of long memory in debt series and its relation with growth

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  • Joao Sousa Andrade
  • Irina Syssoyeva-Masson

Abstract

The relationship between public debt (d) and economic growth (g) has been and continue to be the subject of much empirical and theoretical attention in the literature as witnessing by the number of a growing empirical literature and very recent contributions. The policy recommendations of these studies have a great importance for governments and voters.However, the preliminary statistical data analyses are quite often absent from these studies what may in fact invalidate the empirical results. Therefore, the main purpose of this paper is to investigate the statistical properties of d (Debt-to- GDP) series to reveal the existence of long memory in d series besides the fact that this variable is not stationary and to shed light on importance of preliminary statistical data investigations. To do so we apply several statistical methods to the new data set on Gross Government Debt-to- GDP ratios for 87 countries over long period from the historical public debt database (HPDD) built by the International Monetary Fund (IMF). The main conclusions of this study are that d series has a long memory and should not be considered as a short-run phenomena, instead, its behavior should be analyzed in a long-term context; and its non-stationarity doesn't allow researchers to apply stationary econometrics methods to model its behavior. Thess finding implies that the relation between economic growth (g) and national debt (d), g = F (d), that has been characterizing the literature on the subject has not solid econometric foundations. After the review of the literature we propose to analyse the public debt ratio long memory and by the study of its stationary characteristics to reject the presence of cointegration between it and growth. The appropriate tests are employed. Absence of cointegration and rejection of the already traditional threshold effect of public debt on growth. The type of relation must respect econometric principles to avoid spurious relations.

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  • Joao Sousa Andrade & Irina Syssoyeva-Masson, 2016. "Investigating the presence of long memory in debt series and its relation with growth," EcoMod2016 9627, EcoMod.
    • Handle: RePEc:ekd:009007:9627
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    For the larger sample: 87 countries.; Finance; Growth;
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