Role of Uncertainty in Debt-Growth Nexus

Mindaugas Butkus, Diana Cibulskiene, Lina Garsviene and Janina Seputiene

Prague Economic Papers, 2022, vol. 2022, issue 1, 58-78

Abstract: This paper analyses uncertainty as one of the factors that affect the public debt-growth nexus. We put forward a hypothesis that uncertainty mediates the effect of public debt on economic growth. The empirical examination of the mediating effect is based on the neoclassical growth equation and consistent with specifications previously used to analyse the sources of heterogeneity in the debt-growth relationship. Since one part of the uncertainty is financial risk, which is closely related to the financial sector stability, we use interest rate spread as a main variable, and the risk premium on lending as an alternative one to proxy financial risk and thus, to some extent, uncertainty. Our results show that lower uncertainty is related to a bigger positive effect of debt on growth and a higher turning point in the debt-growth nexus. On the contrary, higher uncertainty leads to a lower positive and more considerable negative effect of debt on growth in both linear and quadratic specifications.

Keywords: Debt-growth nexus; uncertainty; interest rate spread; risk premium; financial risk (search for similar items in EconPapers)
JEL-codes: E43 H63 H68 O40 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.18267/j.pep.790

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