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Government Debt and Growth: The Role of Liquidity

Mathieu Grobéty

No 2017-13, Working Papers from Swiss National Bank

Abstract: How does government debt affect long-run economic growth? A prominent strand of theoretical literature suggests that government debt has a negative effect on growth. Another strand argues that government debt can foster growth by enhancing the supply of liquid assets or collateral. We empirically investigate the liquidity channel of government debt and apply the difference-in-differences methodology of Rajan and Zingales (1998) on a sample of 28 manufacturing industries across 39 developing and developed countries. We provide evidence that industries with greater liquidity needs tend to grow disproportionately faster in countries with higher levels of government debt. The positive liquidity effect of government debt on industry growth stems from domestic debt, not external debt. We perform a battery of robustness checks and show that our results are robust to using instrumental variables and controlling for many competing channels.

Keywords: Government Debt; Growth; Liquidity; Non-linearity (search for similar items in EconPapers)
JEL-codes: D92 G21 H63 O16 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2017
New Economics Papers: this item is included in nep-fdg and nep-gro
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