The determinants of public debt in the Euro area: A panel ARDL approach
Themba Chirwa () and
Nicholas Odhiambo ()
No 23509, Working Papers from University of South Africa, Department of Economics
This study investigates the determinants of public debt in the EURO area that are either debt-reducing or debt-creating using panel data from 10 European Countries. Using a panel ARDL approach, the study results show that though the real interest rate ? economic growth differential in debt dynamics can be used to show whether debt is explosive or non-explosive, we find the speed of adjustment to be a good predictor. The study results also reveal that while economic growth is debt-reducing mainly in the short-run, the real exchange rate, investment, population growth are debt-reducing in the long run. Similarly, though the real interest rate is debt-creating both in the short- and long-run, government consumption is debt-creating in the long run while the relationship is mixed in the short-run and differentiated across groups. These results have important policy implications for the European Union. They include the need to continue having differentiated Medium-Term Budgetary Objectives implemented across member states that focus on fiscal sustainability as well as take into account all factors that may be debt-creating or debt-reducing. Furthermore, there is need for European authorities to implement strategies that would encourage lower or stable long-term interest rates as a strategy to reduce the accumulation of public debt in the future.
Keywords: Euro Area; Panel ARDL Models; Cointegration; Public Debt (search for similar items in EconPapers)
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