The study of public debt: which are the distinctions between the emerging and advanced economies in the European Union?

Abstract

The aim of this paper is to provide a comprehensive study of public debt, emphasizing the existing distinctions between the emerging and advanced economies across the European Union. Using annual data ranging from 1995 to 2013, we conducted a manifold investigation. Firstly, we studied the descriptive statistics of key variables affecting public debt dynamics. We found that the ex-communist countries recorded lower public debt ratios, negative flow costs and primary deficits. By comparison, the advanced economies achieved primary surpluses in order to balance larger public debt-to-GDP ratios and positive flow costs. Secondly, using the accounting approach we analyzed the dynamics of public debt. The results indicated unstable patterns for the Czech Republic, Latvia, Lithuania, Poland, Slovakia, Slovenia, Cyprus, France, Germany, Greece, Ireland, Italy, Malta, Portugal, Spain and the United Kingdom. Employing a logit model with fixed effects, we also showed that running primary deficits is more likely to increase the probability of having unstable dynamics of public debt. Thirdly, we examined the distribution of the flow cost which revealed the existence of fat tails, suggesting an increased likelihood of large debt burdens. We also found that the uncertainty of the future debt burden is mainly driven by the variability of the real GDP growth rate.