Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions

Christian Proaño, Christian Schoder and Willi Semmler

Department of Economics Working Papers from Vienna University of Economics and Business, 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 level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. 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; economic growth; dynamic panel threshold regression (search for similar items in EconPapers)
JEL-codes: E20 G15 H63 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-gro, nep-mac and nep-opm
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Related works:
Journal Article: Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions (2014)
Working Paper: Financial Stress, Sovereign Debt, and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions (2014)
Working Paper: Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions (2014)
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