IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/62827.html
   My bibliography  Save this paper

Public Capital Expenditure and Debt Dynamics: Evidence from the European Union

Author

Listed:
  • Bhatt Hakhu, Antra
  • Piergallini, Alessandro
  • Scaramozzino, Pasquale

Abstract

This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries over the sample period 1980-2013. We find robust evidence of a negative cointegrating relation, according to which increases in the capital expenditure-GDP ratio cause reductions in the debt-GDP ratio in the long run. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. Consistently with the “golden rule of public finance”, EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.

Suggested Citation

  • Bhatt Hakhu, Antra & Piergallini, Alessandro & Scaramozzino, Pasquale, 2014. "Public Capital Expenditure and Debt Dynamics: Evidence from the European Union," MPRA Paper 62827, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:62827
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/62827/1/MPRA_paper_62827.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Iwamoto, Yasushi, 1990. "An Evaluation of Public Investment Policy in Postwar Japan," Economic Review, Hitotsubashi University, vol. 41(3), pages 250-261, July.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. António Afonso & Christophe Rault, 2010. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 731-755, January.
    4. Piergallini, Alessandro & Postigliola, Michele, 2013. "Non-linear budgetary policies: Evidence from 150 years of Italian public finance," Economics Letters, Elsevier, vol. 121(3), pages 495-498.
    5. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    6. Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 211-249, National Bureau of Economic Research, Inc.
    7. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    8. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    9. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    11. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    12. repec:bla:scandj:v:95:y:1993:i:4:p:607-25 is not listed on IDEAS
    13. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    14. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    15. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
    16. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    17. Blanchard, Olivier & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
    18. Bruce, Neil & Turnovsky, Stephen J, 1999. "Budget Balance, Welfare, and the Growth Rate: "Dynamic Scoring" of the Long-Run Government Budget," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 162-186, May.
    19. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
    20. Groneck, Max, 2010. "A golden rule of public finance or a fixed deficit regime?: Growth and welfare effects of budget rules," Economic Modelling, Elsevier, vol. 27(2), pages 523-534, March.
    21. Sarno, Lucio, 2001. "The behavior of US public debt: a nonlinear perspective," Economics Letters, Elsevier, vol. 74(1), pages 119-125, December.
    22. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    23. Trabandt, Mathias & Uhlig, Harald, 2011. "The Laffer curve revisited," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 305-327.
    24. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Achim Truger, 2015. "Implementing the golden rule for public investment in Europe," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 138, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.
    2. Hans Pitlik & Michael Klien & Stefan Schiman-Vukan, 2017. "Stabilitätskonforme Berücksichtigung nachhaltiger öffentlicher Investitionen," WIFO Studies, WIFO, number 60595.
    3. Zharku Lutfi, 2018. "(Un)Productive Use of Public Debt in Kosovo," Ekonomika (Economics), Sciendo, vol. 97(2), pages 18-37, December.

    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. António Afonso & Christophe Rault, 2010. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 731-755, January.
    2. Campo, Jacobo & Mendoza, Henry, 2018. "Gasto público y crecimiento económico: un análisis regional para Colombia, 1984-2012," Revista Lecturas de Economía, Universidad de Antioquia, CIE, issue 88, pages 77-108, January.
    3. David Greasley & Les Oxley, 2010. "Cliometrics And Time Series Econometrics: Some Theory And Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 24(5), pages 970-1042, December.
    4. Imed Drine & Christophe Rault, 2006. "Testing for inflation convergence between the Euro Zone and its CEE partners," Applied Economics Letters, Taylor & Francis Journals, vol. 13(4), pages 235-240.
    5. Alessio Ciarlone, 2019. "The relationship between financial development and growth: the case of emerging Europe," Questioni di Economia e Finanza (Occasional Papers) 521, Bank of Italy, Economic Research and International Relations Area.
    6. Jacobo Campo & Henry Mendoza, 2018. "Public expenditure and economic growth: a regional analysis for Colombia, 1984-2012," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 88, pages 77-108, Enero - J.
    7. Hans Pitlik, 2010. "Fiscal Governance and Government Investment in Europe since the 1990s," WIFO Working Papers 370, WIFO.
    8. Ogali, Oscar I.O. & Okoro, Emeka E. & Olafuyi, Saburi G., 2023. "Assessing consensus on nexus between natural gas consumption and economic growth," Renewable and Sustainable Energy Reviews, Elsevier, vol. 187(C).
    9. BADALYAN, Gohar & HERZFELD, Thomas & RAJCANIOVA, Miroslava, 2014. "Transport Infrastructure And Economic Growth: Panel Data Approach For Armenia, Georgia And Turkey," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra, vol. 17(2), pages 1-10, October.
    10. Ronald MacDonald & Flávio Vieira, "undated". "A panel data investigation of real exchange rate misalignment and growth," Working Papers 2010_13, Business School - Economics, University of Glasgow.
    11. Chebli Mongi & Kais Saidi, 2024. "The Impact of Corruption, Government Effectiveness, FDI, and GFC on Economic Growth: New Evidence from Global Panel of 48 Middle-Income Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 10696-10721, September.
    12. Gautam, Tej K. & Paudel, Krishna P., 2018. "The demand for natural gas in the Northeastern United States," Energy, Elsevier, vol. 158(C), pages 890-898.
    13. Sallahuddin Hassan & Zalila Othman & Mohd Zaini Abd Karim, 2011. "Private and Public Investment in Malaysia: A Panel Time-Series Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 199-210.
    14. Omid Ranjbar & Xiao-Lin Li & Tsangyao Chang & Chien-Chiang Lee, 2015. "Stability of long-run growth in East Asian countries: New evidence from panel stationarity test with structural breaks," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(4), pages 570-589, June.
    15. Mounir Belloumi & Ahmed Aljazea, 2024. "Relationship between Energy and Economic Growth: Evidence from a Panel Nonlinear ARDL Model," International Journal of Energy Economics and Policy, Econjournals, vol. 14(2), pages 468-476, March.
    16. Olesia Kozlova & Jose Noguera-Santaella, 2019. "Relative efficiency of oil price versus oil output in promoting economic growth: Is OPEC’s strategy right?," Empirical Economics, Springer, vol. 57(6), pages 1997-2012, December.
    17. Mehmet Balcilar & Ojonugwa Usman & George N. Ike, 2023. "Investing green for sustainable development without ditching economic growth," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(2), pages 728-743, April.
    18. Márquez, Miguel A. & Ramajo, Julián & Hewings, Geoffrey J. D., 2011. "Public Capital and Regional Economic Growth: a SVAR Approach for the Spanish Regions," INVESTIGACIONES REGIONALES - Journal of REGIONAL RESEARCH, Asociación Española de Ciencia Regional, issue 21, pages 199-223.
    19. Schneider, Nicolas & Strielkowski, Wadim, 2023. "Modelling the unit root properties of electricity data—A general note on time-domain applications," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 618(C).
    20. Gharehgozli, Orkideh, 2021. "An empirical comparison between a regression framework and the Synthetic Control Method," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 70-81.

    More about this item

    Keywords

    Fiscal sustainability; EU; panel cointegration; public expenditure; public debt.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:pra:mprapa:62827. 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: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    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.