The predictive content of public debt for real output expansions and contractions over three centuries: A Markov switching analysis for the UK

Ioannis Karfakis

The Journal of Economic Asymmetries, 2021, vol. 24, issue C

Abstract: This paper examines the relationship between public debt and real output in the UK during the last three centuries to identify changes in the historical growth rates of real output, to understand the asymmetric behavior over real output expansions and contractions, and to consider whether the growth rate of the debt-to-GDP ratio is a leading indicator of the time-varying transition probabilities between expansions and contractions. The Markov switching analysis showed that changes in the debt-to-GDP ratio have predictive content for real output expansions with a negative sign and constitute a leading indicator of the transition probabilities across the two regimes.

Keywords: Public debt; Output growth; Asymmetric behavior; Predictive content; Markov switching; Time-varying probabilities (search for similar items in EconPapers)
JEL-codes: C4 C5 E3 E6 H (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:24:y:2021:i:c:s1703494921000104

DOI: 10.1016/j.jeca.2021.e00205

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