Abstract
This study empirically investigates the relationship between economic growth and several factors (investment, private and government consumption, trade openness, population growth and government debt) in Greece, where imbalances persist several years after the financial crisis. The results reveal a long-run relationship between variables. Investment as private and government consumption and trade openness affect positively growth. On the other hand, there is a negative long-run effect of government debt and population growth on growth. Furthermore, the study addresses the issue of break effects between government debt and economic growth. The results indicate that the relationship between debt and growth depends on the debt breaks. Specifically, at debt levels before 2000, increases in the government debt-to-GDP ratio are associated with insignificant effects on economic growth. However, as government debt rises after 2000, the effect on economic growth diminishes rapidly and the growth impacts become negative. The challenge for policy makers in Greece is to halt the rising of government debt by keeping a sustainable growth path. Fiscal discipline should be combined with the implementation of coherent, consistent and sequential growth-enhancing structural reforms.
Highlights
The rising government debt levels and its interactions with other determinants of economic growth, especially in the aftermath of global financial crisis, have necessitated the revival of the academic and policy debate on the impact of growing debt levels on growth (Jiménez-Rodríguez and Rodríguez-López 2015; Bökemeier and Greiner 2015; Swamy 2015a, 2015b)
The purpose of this study is to investigate the impact of government debt and other economic determinants on the growth of the Greek economy, by using the Autoregressive Distributed Lag (ARDL) model and the Vector Autoregressive Model (VAR) methodology
In order to determine the effect of debt-to-GDP ratio in GDP, we add on the right-hand side of equation some growth control variables, which include investment, private consumption, public consumption, trade openness and population growth
Summary
The rising government debt levels and its interactions with other determinants of economic growth, especially in the aftermath of global financial crisis, have necessitated the revival of the academic and policy debate on the impact of growing debt levels on growth (Jiménez-Rodríguez and Rodríguez-López 2015; Bökemeier and Greiner 2015; Swamy 2015a, 2015b). Greece, having longitudinal underlying pathologies, faced serious economic problems (fiscal, financial, structural, imbalances etc.). These problems have influenced other determinants of economic growth such as investment, consumption, trade openness and population growth. High levels of government debt made Greece the “weak link” of the economic crisis in the Eurozone. Greece entered the crisis of 2008 with the highest debt-to-GDP ratio among the economies of the Eurozone and had, together with Italy, the highest level of tax evasion and the Economies 2018, 6, 10; doi:10.3390/economies6010010 www.mdpi.com/journal/economies
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