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Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions

Christian R. Proaño, Christian Schoder and Willi Semmler ()

Journal of International Money and Finance, 2014, vol. 45, issue C, 17-37

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
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Working Paper: Financial Stress, Sovereign Debt, and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions (2014) Downloads
Working Paper: Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions (2014) Downloads
Working Paper: Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions (2014) Downloads
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