Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter?

Filip Ostrihoň (), Mária Širaňová and Menbere Workie Tiruneh ()

Panoeconomicus, 2023, vol. 70, issue 1, 47-69

Abstract: This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members’ growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals. JEL: F34, F43, H63.

Keywords: Debt overhang; Debt threshold level; Panel data; Interaction effects; Quantile regression (search for similar items in EconPapers)
Date: 2023
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