Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Nonlinear Dynamic Panels

Christian Proaño, Christian Schoder and Willi Semmler

No 1304, Working Papers from New School for Social Research, Department of Economics

Abstract: We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the state of the financial market. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifi- cations from the financial sector. For thirteen industrialized economies we study empirically the relationship between the GDP-growth rate, the debt-GDP ratio, and the financial stress index for the period 1980-2010 using quarterly data and dynamic single-country and dynamic panel threshold regression methods. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.

Keywords: financial stress; sovereign debt; non-linear econometrics; threshold regression; thresh- old panel regression (search for similar items in EconPapers)
JEL-codes: E20 G15 H63 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013-10
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:1304

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