Does euro area membership affect the relation between GDP growth and public debt?

Christian Dreger and Hans-Eggert Reimers

Journal of Macroeconomics, 2013, vol. 38, issue PB, 481-486

Abstract: We analyse the relationship between the debt-to-GDP ratio and real per capita GDP growth for euro area members and a broader set of industrial countries by distinguishing periods of sustainable and non-sustainable debt. Thresholds for debt are theory-driven and depend on macroeconomic conditions. If the nominal interest rate exceeds nominal output growth, primary budget surpluses are required to achieve a sustainable government debt ratio. The negative impact of the debt-to-GDP ratio is limited to the euro area and periods of nonsustainable public debt. In the broader panel of industrial countries, the negative debt effect diminishes. Instead, debt will exert a positive impact on growth given that it is sustainable. This result is fairly robust and holds even for exogenous thresholds. While the relationship between debt and growth is subject to nonlinearities, the evidence suggests that the participation in monetary union might entail an additional risk for its members.

Keywords: Euro area debt crisis; Debt and growth; Sustainability of debt (search for similar items in EconPapers)
JEL-codes: C23 F43 O11 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (39)

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Related works:
Working Paper: Does Euro Area Membership Affect the Relation between GDP Growth and Public Debt? (2012)
Working Paper: Does euro area membership affect the relation between GDP growth and public debt? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:38:y:2013:i:pb:p:481-486

DOI: 10.1016/j.jmacro.2013.07.012

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