The role of government debt in economic growth

• Main Author: Afonso, António
• Publication Date: 2014
• Other Authors: Alves, José
• Format: Article
• Language: eng
• Source: Repositórios Científicos de Acesso Aberto de Portugal (RCAAP)
• Download full: http://hdl.handle.net/10400.5/7410
• topic: Government Debt; Economic Growth; Debt Thresholds

We study the effect of public debt on economic growth for annual and 5-year average growth rates, as well as the existence of non-linearity effects of debt on growth for 14 European countries from 1970 until 2012. We also consider debt-to-GDP ratio interactions with monetary, public finance, institutional and macroeconomic variables. Our results show a negative impact of -0.01% for each 1% increment of public debt, although debt service has a 10 times worse effect on growth. In addition, we find average debt ratio thresholds of around 75%. Belonging to the Eurozone has a detrimental effect of at least -0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth.