Abstract

We study the effect of public indebtedness on economic growth in Latin American economies. Our main findings indicate that a Public Debt-GDP ratio of 75% leads to a deceleration in growth. On the other hand, a ratio of 35% increases the growth volatility. By using a Panel VAR we also found that external shocks, such as the foreign capital flows and the terms of trade, influence in the public debt effect on the economic growth. Clearly, the higher the level of public debt, the more vulnerable the economy can be in the short term; however, in the long term the growth is relevant for fiscal sustainability.

Highlights

  • There is no doubt that the level of public indebtedness is a current policital debate, for developed countries, and for emerging economies

  • We empirically evaluate the relationship between the level of public debt and the stability of economic growth for eight countries in Latin America (Colombia, Peru, Chile, Argentina, Mexico, Brazil, Ecuador and Bolivia), from 1990 to 2015

  • We review the literature regarding the relationship between public debt, economic growth and macroeconomic vulnerability in developed and emerging economies

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Summary

INTRODUCTION

There is no doubt that the level of public indebtedness is a current policital debate, for developed countries, and for emerging economies. We empirically evaluate the relationship between the level of public debt and the stability of economic growth for eight countries in Latin America (Colombia, Peru, Chile, Argentina, Mexico, Brazil, Ecuador and Bolivia), from 1990 to 2015. Et al.: Public debt and Stability in Economic Growth: Evidence for Latin America intolerance implies that level of public debt relative to GDP is lower than the one at advanced economies (Reinhart and Rogoff, 2010; Reinhart et al, 2003). Our main contribution is an illustration of the relationship between public debt and economic growth in Latin America emerging countries. We review the literature regarding the relationship between public debt, economic growth and macroeconomic vulnerability in developed and emerging economies.

LITERATURE REVIEW
DATA AND STYLIZED FACTS
ECONOMETRIC ANALYSIS
RESULTS
CONCLUSIONS
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