Public debt, GDP and the Sovereign Debt Laffer curve: A country-specific analysis for the Euro Area

Diptes Bhimjee,Emanuel Leão

doi:10.14254/2071-8330.2020/13-3/18

Abstract

Public debt, GDP and the Sovereign Debt Laffer curve: A country-specific analysis for the Euro Area

Highlights

The Euro Area sovereign debt crisis constitutes a cumbersome epilogue to the global financial crisis, a systemic event that has deeply scarred international financial markets and affected the performance of real economies
This question addresses whether the public debt fiscal instrument has been overused in the aftermath of the Global Financial Crisis20
Public debt thresholds representing the maximum level of leverage public debt lends to Gross Domestic Product (GDP) were estimated for each Member State

Summary

Introduction

The Euro Area sovereign debt crisis constitutes a cumbersome epilogue to the global financial crisis (hereinafter GFC), a systemic event that has deeply scarred international financial markets and affected the performance of real economies. In order to countervail the GFC’s economic impact, the Euro Area economies have adopted a common expansionary monetary policy (e.g., the ECB’s quantitative easing program) whilst pursuing heterogeneous fiscal policies that have endeared each Member State’s public purse. Where the pursuit of heterogeneous expansionary fiscal policies is concerned, the corresponding financing burden has mainly fallen upon the public debt instrument. The present article investigates to what extent the public debt financing instrument has been strained in the aftermath of the GFC. The article’s research question is the following: Is excessive sovereign debt accumulation by the Euro Area Member States associated with the decline of the said Member States’ GDP schedules? In order to achieve this research goal, the article employs a quadratic econometric specification, so that the impact of non-linearities related to public debt might be properly determined for each Euro Area Member State. Recent empirical evidence characterizing the relation between public debt and economic growth suggests that countries presenting low public debt levels are associated with higher economic growth rates; while lower economic growth rates are associated with higher public debt levels (Ramos-Herrera & Sosvilla-Rivero, 2017)

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