The Heterogeneous Public Debt–Growth Relationship: The Role of the Expenditure Multiplier

Mindaugas Butkus, Diana Cibulskiene, Lina Garsviene and Janina Seputiene
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Mindaugas Butkus: Vilnius University Siauliai Academy, LT-76352 Siauliai, Lithuania
Diana Cibulskiene: Vilnius University Siauliai Academy, LT-76352 Siauliai, Lithuania
Lina Garsviene: Vilnius University Siauliai Academy, LT-76352 Siauliai, Lithuania
Janina Seputiene: Vilnius University Siauliai Academy, LT-76352 Siauliai, Lithuania

Sustainability, 2021, vol. 13, issue 9, 1-22

Abstract: Currently countries are facing a new crisis caused by the COVID-19, which leads to the rise of government expenditures and additional borrowing. This situation highlights the importance of examine factors which determine the level of public debt that still sustains economic growth. A growing body of research supports the idea of a non-linear debt–growth relationship and estimates the threshold level above which debt becomes unsustainable and has a negative effect on output. The empirical evidence points out that there is no single sustainable debt threshold level that holds for all countries. This research complements scarce empirical evidence on the heterogeneous debt–growth relationship and provides some insights on the publicly available statistical indicators that might signal a relatively low/high expenditure multiplier and, at the same time, potentially unsustainable/sustainable growth stimulus through the use of borrowed funds. We test the hypothesis that the expenditure multiplier is shaping the impact of public debt on growth. Our empirical examination is based on panel data analysis in the groups of countries with expected relatively high and low expenditure multiplier. Research results show that a statistically significant negative marginal effect of debt on growth starts to manifest at a lower debt-to-GDP ratio when the expenditure multiplier is lower and vice-versa. The study shed some light on the sources of heterogeneity in a debt–growth relationship. We can conclude that countries with a high expenditure multiplier level can borrow more and sustain growth. In contrast, in countries with a lower expenditure multiplier, a relatively low debt level becomes unsustainable for growth.

Keywords: public debt; economic growth; expenditure multiplier; debt threshold level (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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