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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

Abstract: 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)
Date: 2018-01-11
New Economics Papers: this item is included in nep-eec and nep-mac
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