 Does Public Debt Produce a Crowding Out Effect for Public Investment in the EU?Mattia Osvaldo Picarelli, Willem Vanlaer and Wim Marneffe Working Papers from European Stability Mechanism Abstract: This paper exploits a panel dataset for 26 EU countries, between 1995 and 2015, to examine the extent to which increased levels of public debt have led to reduced public investment, the so-called ‘debt overhang’ hypothesis. To address endogeneity concerns, we use an instrumental variable approach based on a GMM estimation. Our results validate the debt overhang hypothesis and remain robust across various estimation techniques. The GMM specification with year dummies indicates that a 1% increase in public debt in the EU brings about a reduction in public investment of 0.03%. Moreover, we find evidence that: 1) the results are mainly driven by high-debt countries; 2) the negative impact of debt on investment is slightly smaller in the Eurozone than in the entire EU; 3) both the stock and flow of public debt play a role in reducing public investment with the impact of the latter that is found to be more profound. Keywords: public investment; debt overhang; credit rationing (search for similar items in EconPapers) Published Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:36 Access Statistics for this paper More papers in Working Papers from European Stability Mechanism Contact information at EDIRC. |
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