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Public debt and economic growth: Economic systems matter

Markus Ahlborn and Rainer Schweickert

No 281, Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics

Abstract: Most studies on the relationship between public debt and economic growth implicitly assume homogeneous debt effects across their samples. We - in accordance with recent literature - challenge this view and state that there likely is a great deal of cross-country heterogeneity in that relationship. However, other than scholars assuming that all countries are different, we expect that clusters of countries differ. We identify three country clusters with distinct economic systems: Liberal (Anglo Saxon), Continental (Core EU members) and Nordic (Scandinavian). We argue that different degrees of fiscal uncertainty at comparable levels of public debt between those economic systems constitute a major source of heterogeneity in the debt-growth relationship. Our empirical evidence supports this assumption. Continental countries face more growth reducing public debt effects than especially Liberal countries. There, public debt apparently exerts neutral or even positive growth effects, while for Nordic countries a non-linear relationship is discovered, with negative debt effects kicking in at public debt values of around 60% of GDP.

Keywords: public debt; economic growth; economic systems; fiscal policy; welfare state (search for similar items in EconPapers)
JEL-codes: E62 P10 P51 H10 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-eec, nep-fdg, nep-gro, nep-mac and nep-pbe
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Related works:
Journal Article: Public debt and economic growth – economic systems matter (2018) Downloads
Working Paper: Public debt and economic growth: Economic systems matter (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:281

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