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Public debt and economic growth nexus in the euro area: A dynamic panel ARDL approach

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  • Chirwa, Themba G
  • Odhiambo, Nicholas M

Abstract

This study investigates the relationship between public debt and economic growth in 10 European Countries in the presence of cross-sectional dependency. Using a panel ARDL approach, the results show that public debt and other covariates such as investment, government consumption, and inflation revealed significant but mixed country-specific results only in the short run. The results also show that the real exchange rate and the real interest rate are negatively and significantly associated with economic growth both in the short and the long run. Furthermore, population growth was found to be positively associated with economic growth only in the short run, while trade was negatively associated with income growth only in Spain. The creation of the EMU was detrimental to Greece as it revealed a significant negative relationship with income growth. These findings have significant policy implications for the Stability and Growth Pact of the Euro area. It is recommended that member states should ensure fiscal sustainability by balancing their fiscal budgets to effectively reduce the accumulation of public debt as well as implementing structural reforms that will improve the efficiency of investment as well as macroeconomic stability.

Suggested Citation

  • Chirwa, Themba G & Odhiambo, Nicholas M, 2020. "Public debt and economic growth nexus in the euro area: A dynamic panel ARDL approach," Working Papers 26644, University of South Africa, Department of Economics.
    • Handle: RePEc:uza:wpaper:26644
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    Cited by:

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    4. Mihaela Onofrei & Ionel Bostan & Bogdan Narcis Firtescu & Angela Roman & Valentina Diana Rusu, 2022. "Public Debt and Economic Growth in EU Countries," Economies, MDPI, vol. 10(10), pages 1-23, October.

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    More about this item

    Keywords

    Euro Area; Panel ARDL Models; Cross-Section Dependence; Public Debt; Economic Growth;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-

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