The spending multiplier in a time of massive public debt: The Euro-area case

Radu Vranceanu and Damien Besancenot

Applied Economics Letters, 2013, vol. 20, issue 8, 758-762

Abstract: This article argues that in Euro-area economies, where the European Central Bank (ECB) cannot bail out financially distressed governments, the spending multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt; in particular, when the public debt exceeds 150% of GDP, the growth impact of the deficit might turn negative.

Date: 2013
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Working Paper: The spending multiplier in a time of massive public debt: the euro area case (2012)
Working Paper: The spending multiplier in a time of massive public debt: the euro area case (2012)
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DOI: 10.1080/13504851.2012.741674

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