Rise In Public Debt Research Articles

To Starve the Beast or Not to Starve the Beast? Evidence from Debt-Distressed Region

ABSTRACT The elimination of budgetary disequilibrium remains a contentious issue, with scholars and policymakers debating the efficacy of tax alterations versus limiting government outlays. This topic has garnered significant attention, although research on the spending-revenue nexus is noticeably skewed against Africa, which presents an intriguing research opportunity. The International Monetary Fund (IMF) reported a concerning rise in public debt across Africa, highlighting the urgent need for public finance consolidation. In contrast to the extant literature, this study examines the dynamic link between revenues and expenditures from 1990 to 2022. Applying wavelet decomposition to account for temporary variations, our analysis reveals dynamic patterns in the revenue-expenditure nexus. Our findings support the institutional separation hypothesis in the short run, suggesting a distinct relationship between revenues and outlay. However, in the medium-to long-run, our results support the fiscal synchronization hypothesis, accentuating a more intertwined association between revenues and expenditures. This study sheds light on the nuanced dynamics of budgetary equilibrium in Africa, providing insights that can inform policy priorities and decision-making. Finally, by focusing on the unique context of Africa and using advanced techniques, this study contributes to the existing literature on budgetary equilibrium, filling a crucial gap in our knowledge of the public finance dynamics in the region.

Fiscal Policy Determinants of Health Spending in India: State Versus Center

This study uses data from 1986 to 2021 and the auto-regressive distributed lag model to explore India’s fiscal policy determinants of government health spending. The results find two structural breaks in time: (i) 2002 for state government health spending (SGHS) and (ii) 2014 for central government health spending. The results also show that central revenue transfers to states have a positive and statistically significant effect on SGHS in the long run. The results imply that a 1% rise in central revenue transfers to states leads to a 0.399% increase in SGHS. Further, state government public debt exhibits a negative and statistically significant relationship with SGHS, implying that a 1% rise in public debt leads to a 0.119% fall in SGHS in the long run. Fiscal management (i.e., revenue mobilization and debt sustainability) is essential to prepare a long-term strategy for health-care financing.

AN INVESTIGATION ON IMPACT OF TRADE OPENNESS & BUDGET DEFICIT ON PAKISTAN'S PUBLIC DEBT: ARDL APPROACH TO COINTEGRATION

In this empirical research, the purpose was to investigate the impact of trade openness and budget deficits on public debt in Pakistan. In this regard, data was examined spanning from 1975 to 2020. To map both long-run and short -run interactions, we used the autoregressive distributed lag (ARDL) method of co-integration along with ECM approaches. The results show that variables such as public debt, budget deficit, trade openness, and inflation have long- and short-term co-integration. Also, trade openness’s coefficient’s negative sign with value of -0.759 confirms negative relationship between public debt, trade openness and shows that a 1% upsurge in trade openness will bring a 75.9% decrease in public debt’s growth in Pakistan. While budget deficit and inflation both possess a positive sign of coefficients and a positive link with public debt, the coefficient of budget deficit is 0.498, which depicts that a 1% escalation in budget deficit will lead to a rise in public debt of 49.8 percent. In conclusion, Pakistan's national debt is rising due to budget deficit & inflation, but it is falling due to trade openness. To reduce budget deficit, government should balance domestic & external debt so as to sustain desired position. So, it is suggested the government actively trade internationally to minimize the public debt.

Non-Linear Impact of Public Debt on Inflation in Rwanda

Abstract This paper examines Rwanda’s debt-inflation dynamics and the asymmetric effect of government debt on inflation using time series data spanning the years 1980–2021. The study applied a battery of tests to examine the debt-inflation linkage in this country, including the bounds F-test for cointegration, the Brock-Dechert-Scheinkman (BDS) nonlinearity test, the Wald test for asymmetries and the nonlinear autoregressive distributed lag (NARDL) model for short run and long run asymmetric impact. The results of the NARDL bounds F-test for cointegration support a long-run nonlinear link between public debt and inflation in Rwanda. The findings of the BDS test reveal that the series is nonlinear in all dimensions, whereas the results of the Wald test show that public debt has an asymmetric impact on inflation, regardless of the timescale considered. The NARDL findings show that while a rise in public debt tends to be inflationary in the short run, a decline in public debt typically leads to a decrease in inflation in the long run. The study also demonstrates that inflation responds more rapidly and strongly to positive than negative shocks in public debt. The country should think about continuous enforcement of fiscal consolidation measures and reforms, as well as implementing economic growth-friendly policies to reduce debt increases in the short run. This will induce a decline in inflation and enhance macroeconomic stability in the long run.

Održivost fiskalnog okvira i privredni rast u Srbiji

In the last three years, Serbia led a very expansionary fiscal policy, with a fiscal deficit higher than the average of the countries of Central and Eastern Europe (CEE) 1 and the Western Balkans 2 . This led to a significant rise in public debt in absolute terms, while public debt-to-GDP ratio increased only slightly, due to the currency structure of debt, the unchanged exchange rate of the dinar against the Euro, and high inflation. At the end of 2022, Serbia was the European median in terms of public debt, although the debt was above the average of comparable CEE countries. Despite the moderate level of debt, public interest expenditures and the effective interest rate on Serbia's public debt are relatively high in European terms, which is a consequence of the fact that financial markets in less developed countries see the limit of sustainability of public finances at a lower level of indebtedness than in developed countries. Tightening of monetary policy in the world will trigger the further increase of government spending on interest, which may crowd-out more productive public expenditures or narrow the room for tax cuts, which is why it is especially important to keep the public debt at a lower level in the coming period. At the end of 2022, Serbia implemented a fundamental reform of fiscal rules. The advantage of the new fiscal rules is reflected in a lower deficit target and a more detailed elaboration of the government's response mechanisms to violations of the rules. Raising the public debt ceiling to the upper limit of the prohibitive zone, the elimination of countercyclical elements in the deficit rule and the absence of clear escape clauses for periods of crisis may pose a limitation. The new fiscal rules could contribute to the sustainability of Serbia's fiscal policy, provided that their consistent and continuous application is ensured.

Public Debt and Economic Growth in India: The New Evidence

The study gives new evidence on the effects of public debt on economic growth in India with key macroeconomic indicators from 1980 to 2019. In the past decade, and after the COVID-19 pandemic, there is a substantial rise in public debt, which reached 90% of the GDP in April 2021. Therefore, it is imperative to study the impact of different public debt sources on the Indian economy to help policymakers frame informed debt management policies. The long-run equilibrium relationship and cointegrating coefficients are calculated using Johansen cointegration and fully modified ordinary least square techniques. Toda and Yamamoto’s (1995) Granger causality test is used as a short-run diagnostic test for the long-run equilibrium relationship. The study’s major findings suggest that domestic debt, total factor productivity (TFP) and exports are the major determinants of economic development in the long run. In contrast, economic prosperity determines the growth of external debt, debt service payments and TFP in the short run. It is recommended that the government should control and channel public debt productively for favourable growth effects.

The effect of natural resources extraction and public debt on environmental sustainability

PurposeThe rise in public debt and the increased extraction of natural resources in Ghana at a time that environmental degradation is escalating, especially with carbon dioxide emission, is worrying. This seems to cast doubt on the country's ability to meet the goals of the Paris agreement for climate change and ensuring sustainable development. Consequently, in this study, the effect of natural resources extraction and government debt on carbon dioxide emission is investigated.Design/methodology/approachThe Environmental Kuznets Curve (EKC) hypothesis was adopted for this study. The Fully Modified Ordinary Least Square Model was used for assessing the data. An annual data from 1971 to 2018 was used for the analysis.FindingsThe long-run results based on the Fully Modified Ordinary Least Square analysis reveal that natural resources extraction increases carbon dioxide emissions. Moreover, the joint effect of post-oil production in commercial quantities and natural resources rent increases carbon dioxide emission. Further, the findings document that the initial stage of government debt improves environmental quality up to a point, beyond which an increase in debt hurts the environment. On the environmental degrading effect of economic growth, the findings validate the Environmental Kuznets Curve hypothesis. It is also observed that urbanization degrades environmental quality.Practical implicationsThe study offers appropriate recommendations policymakers need to embrace towards the attainment of lower carbon emissions from the loans and natural resources rent to achieve environmental sustainability.Originality/valueThe effect of debt on carbon dioxide emission is assessed for the Ghanaian economy. It also contributes to studies on the natural resources-carbon emission nexus.

INTERNAL IMBALANCES AND GROWTH IN UKRAINE IN THE VIEW OF FISCAL AND MONETARY ISSUES

Introduction. The frequent crises are a vital impediment to growth in Ukraine. One of the reasons is the accumulated imbalances, which objectively arise if ignoring the economic fundamentals in economic policy implementation. The purpose of the article is to study internal imbalances in Ukraine to determine the causes and consequences of economic slack given fiscal and monetary issues. Results. A critical observation of the Quantity Theory of Money approach in the balance between aggregate demand and supply made it possible to reconstruct the Ukrainian economy’s circular motion for the last ten years. The generation of the coincident and leading composite indices confirmed a difference to be at play between aggregate supply and demand. The parametric Early Warning System modeling results showed that an additional percentage of imbalances between aggregate demand and supply increased the likelihood of crises in Ukraine by 4%. The severe influence of the debt factor on macroeconomic dynamics made it possible to build up a quarterly econometric model by retranslating the exponential trend of the domestic public debt accumulation on GDP motion. The developed Dynamic Stochastic General Equilibrium model made it possible to reconstruct the economy’s prospect to move sustainable growth path, subject to implementing the golden rule of public finance. The fiscal multiplier effect offset the short-run crowding-out effect resulting from debt accumulation for financing public investment in favor of increased production in the long term. The significant parameter in this scenario is public investments efficiency, the increased level of which has to be one of the goals of the economic policy implementation. Conclusions. Fiscal-monetary interaction is crucial for counteracting macroeconomic imbalances and activating economic dynamics. Given the rise in public debt in Ukraine due to the Covid-19 pandemic, borrowing should be cautious while performing the fiscal investment expansion to stimulate growth.

The effect of governance on public debt: an empirical investigation for the Arabian Gulf countries

PurposeThe question of public debt management for both developed and developing economies has created an enormous amount of political as well as academic interest. The purpose of this paper is to examine how governance affects public debt accumulation in the Arabian Gulf countries during the period between 1996 and 2015 period. The six Worldwide Governance indicators (WGI) (voice and accountability (VAA), political stability and the absence of violence/terrorism, government effectiveness (GEFF), regulatory quality (RQ), rule of law (RL) and control of corruption) were used to measure the quality of governance in these countries. The results show that an increase in every governance indicator except control of corruption leads to a decrease in public debt.Design/methodology/approachThe authors estimate a dynamic specification of debt to GDP ratio to study how governance affects public debt accumulation in the Arabian Gulf countries during the 1996–2015 period. The dependent variable in this study is the ratio of public debt to GDP. This study relies on the six measures of institution’s quality given by the WGI. These variables are the VAA, political stability and absence of violence (PSAV)/terrorism, GEFF, RQ, RL and control of corruption. Additional control variables are also incorporated to account for the omitted variables bias. These include the rate of inflation (Al-Marhubi, 2000) and the independent variable lagged one period. The study of the statistical relationship between institutional quality and public debt allows us to quantify the direct effect of governance on public debt, which is the effect that goes through an increase in spending or a reduction in fiscal revenues and not through a decrease in GDP growth. The econometric estimation is carried out using panel fixed effects and GLS random effects.FindingsThe estimation results confirm the core hypothesis, which considers that the poor governance in a country the higher is the ratio of public debt to GDP, ceteris paribus. Indeed, five of the worldwide Governance Index are negatively correlated with public debt ratio. These indices are GEFF, VAA, PSAV, RQ and RL. Empirical findings for other independent variables are consistent with those of empirical studies in the literature. The coefficient on the independent variable per capita income has the theoretically expected negative sign and it is highly statistically significant, implying that the higher the per capita income in a country, the lower the ratio of public debt. The independent variable government expenditure has the theoretically expected positive sign suggesting that the higher the government expenditure, the higher the ratio of public debt. The education variable has negative but not statistically significant coefficients. The independent variables (inflation, unemployment rate and lag debt ratio) have the expected signs and are highly statistically significant, implying that the higher their value in a country, the higher the ratio of public debt to GDP. Having the theoretically expected effect, the GDP growth variable is negatively correlated with public debt ratio but its coefficients are not statistically significant.Originality/valueAlthough the literature on the damaging effects of poor governance on growth is abundant (Tanzi and Davoodi, 2002; Mauro, 1996; Mo, 2001; Mauro, 1996; Brunetti et al., 1997; Campos et al., 1999; Al-Marhubi, 2000; Depken and Lafountain, 2006; Mauro, 1998), only very recently the relationship between institutional quality and public debt accumulation has been addressed. By reviewing the research on political and institutional determinants of public debt, it was found that there are few studies, which have examined regional differences, and even fewer ones have focused on the countries of the Gulf Cooperation Council (GCC). Therefore, this paper aims to fill the gap by focusing on this economic region. Furthermore, when studying the relationship between the quality of institutions and the accumulation of public debt, existing studies focus only on corruption index and neglect other determinants of governance. Thus, a second contribution of the study is to investigate how institution quality, through the six WGI, affects public debt accumulation. Furthermore, given the recent rise in public debt in GCC countries, an increasingly important question is what policy actions do these countries need to take to ensure that their debt will be sustainable and will not overwhelm their financial system? we can add: while there has been much attention given to the political and economic explanations of public debt accumulation in developing and developed countries on a global scale, scholars so far have not focused on this debate in high income oil producers.

Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU

Both Japan and parts of the European Monetary Union have experienced boom and bust in stock and real estate markets, which have been followed by a lasting crisis. The paper analyses the role of a high degree of regional heterogeneity for public debt and monetary policy in the context of crisis. It is shown for Japan that the attempts to maintain regional cohesion via a regional transfer mechanism has contributed to the unprecedented rise in public debt and persistent monetary expansion. Econometric estimations show that in Japan regional redistribution of funds has ensured homogeneous living conditions across Japanese regions pre- and post-crisis. The side condition is monetary expansion. A similar effect could emerge in Europe, if the crisis persists.

The Impact of Sovereign Debt on Growth: An Empirical Study on GIIPS versus JUUSD Countries

1. Introduction Development of several industrial countries during the last centuries links to rise of deficit levels in public budget, which led into a significant rise in public debt, and the following deterioration in financial situations in those countries (Mencinger et al., 2014). Before the Nineteenth century, debt accumulation in industrial countries was relatively slow mainly due to wars. French-British war between 1689-1697 led to rise of British public debt, public debt percentage raised in U.S.A as a result of American revolution, French debt also increased after 1878 as a result of the rise of public disbursement and colonial expansion (Checherita-Westphal and Rother, 2012). In the beginning of nineteenth century a big rise in public debt happened and led into a significant rise in sovereign debt crisis in the world as a consequence of several reasons such as: interest rate decrease, liquidity decrease in markets due to investor's tendency to less liquidity assets which doesn't include risks. Between 1800-2008 Spain suffered thirteen sovereign debt crisis, France suffered eight crises, Austria and Hungary suffered seven crises, Portugal suffered six crises, and Greece suffered five crises (Mireinhart and Rogoff, 2009). Economic and financial crisis contributed to public debt accumulation, when financial crisis which started in less-quality financial institution market in U.S.A led into worst economic recession since 1930 in all advanced economies. Public debt in Euro zone rose up between 2007-2009 by 20%, deficit raised by 814% for the same period (from 0.07% in 2007 to -6.4 % in 2009) while economic growth for the same period regressed by 250% from (3% in 2007 to -4.5 % in 2009). As a result of financial deficit rise, revenue decrease, launching financial stimulation packages, and strong commitment by governments to help stumbling banks in fear of inability to pay off their debt, classifications of financial solvency got worse in several Euro zone countries. That led into a quick transfer from Subprime Mortgages Crisis into sovereign debt crisis started in autumn 2009 in Greece. Soon it spread into other countries such as, Ireland, Portugal, Spain, cypress, Italy. Then, European economy entered the worst state of recession since the beginning of the twentieth century. A study conducted by Haytham Ewaida (2015) showed that economic growth in Euro zone decelerate severely between (2010-2013) when gross domestic product declined by 18% , price index decreased by 19%, and public debt increased by 11% for the same period. Policies on the level of EU were carried out to address the crisis through financial rescue plans for stumbling countries, with conditioned financing for those countries through financial austerity policies, structural reforms in order to improve competitive ability. Positive influence of these measures usually links in the long run to decrease government disbursement in order to get rid of debt burden and increase growth horizons. However, these policies will have negative impact on production, ability to adapt economically in the future, which could lead into a long period of economic recession (Dreger and Reimers, 2013). Debt crisis led to revival of academic and political concern with economic growth impact on public debt. The controversial relationship which links public debt levels and economic growth started to come back. The important question is: Does rise of public debt restrict economic growth? This question is important for policy that will be adopted, because if the answer is yes that means (expansionary fiscal policy which increases debt levels will lead into decreasing levels of economic growth on long run). Yes -answer to this question means negation of positive impact of fiscal stimulation on euro zone economies. This forces policy makers to review their policies (dominant belief became that public debt leads into decreasing economic growth on long run). …

Analysis of Volume, Structure and Dynamics of Russian Foreign Trade Under Conditions of Globalization

1. Introduction Development of several industrial countries during the last centuries links to rise of deficit levels in public budget, which led into a significant rise in public debt, and the following deterioration in financial situations in those countries (Mencinger et al., 2014). Before the Nineteenth century, debt accumulation in industrial countries was relatively slow mainly due to wars. French-British war between 1689-1697 led to rise of British public debt, public debt percentage raised in U.S.A as a result of American revolution, French debt also increased after 1878 as a result of the rise of public disbursement and colonial expansion (Checherita-Westphal and Rother, 2012). In the beginning of nineteenth century a big rise in public debt happened and led into a significant rise in sovereign debt crisis in the world as a consequence of several reasons such as: interest rate decrease, liquidity decrease in markets due to investor's tendency to less liquidity assets which doesn't include risks. Between 1800-2008 Spain suffered thirteen sovereign debt crisis, France suffered eight crises, Austria and Hungary suffered seven crises, Portugal suffered six crises, and Greece suffered five crises (Mireinhart and Rogoff, 2009). Economic and financial crisis contributed to public debt accumulation, when financial crisis which started in less-quality financial institution market in U.S.A led into worst economic recession since 1930 in all advanced economies. Public debt in Euro zone rose up between 2007-2009 by 20%, deficit raised by 814% for the same period (from 0.07% in 2007 to -6.4 % in 2009) while economic growth for the same period regressed by 250% from (3% in 2007 to -4.5 % in 2009). As a result of financial deficit rise, revenue decrease, launching financial stimulation packages, and strong commitment by governments to help stumbling banks in fear of inability to pay off their debt, classifications of financial solvency got worse in several Euro zone countries. That led into a quick transfer from Subprime Mortgages Crisis into sovereign debt crisis started in autumn 2009 in Greece. Soon it spread into other countries such as, Ireland, Portugal, Spain, cypress, Italy. Then, European economy entered the worst state of recession since the beginning of the twentieth century. A study conducted by Haytham Ewaida (2015) showed that economic growth in Euro zone decelerate severely between (2010-2013) when gross domestic product declined by 18% , price index decreased by 19%, and public debt increased by 11% for the same period. Policies on the level of EU were carried out to address the crisis through financial rescue plans for stumbling countries, with conditioned financing for those countries through financial austerity policies, structural reforms in order to improve competitive ability. Positive influence of these measures usually links in the long run to decrease government disbursement in order to get rid of debt burden and increase growth horizons. However, these policies will have negative impact on production, ability to adapt economically in the future, which could lead into a long period of economic recession (Dreger and Reimers, 2013). Debt crisis led to revival of academic and political concern with economic growth impact on public debt. The controversial relationship which links public debt levels and economic growth started to come back. The important question is: Does rise of public debt restrict economic growth? This question is important for policy that will be adopted, because if the answer is yes that means (expansionary fiscal policy which increases debt levels will lead into decreasing levels of economic growth on long run). Yes -answer to this question means negation of positive impact of fiscal stimulation on euro zone economies. This forces policy makers to review their policies (dominant belief became that public debt leads into decreasing economic growth on long run). …

Is social expenditure responsible for recent rise in public debt in OECD countries?

ABSTRACTIn developed economies, social expenditure is alleged to cause the rise in public debt over the last three decades. With dynamic panel data of 34 OECD countries from 1980 to 2014, we find robust evidence that the rise in public debt is not attributable to social expenditure.

Nonfinancial Debt and Economic Growth in Euro-Area Countries

In this paper we analyse the effects of all sources of the accumulation of nonfinancial debt (household, corporate as well as government) on economic growth in ten euro-area countries during the 1980-2015 period. To this end, we make use of three models (a baseline, an asymmetric and a threshold model) based on the empirical growth literature augmented by debt to assess whether a debt change has an impact on growth over and above other determinants, treating the different types of borrowers separately. By exploring the time series dimension in order to properly account for the historical experience of each country in the sample, we aim to detect potential heterogeneities in the relationship across euro area countries. Our results with both the baseline and the asymmetric models suggest that although the effects on nonfinancial debt accumulation clearly differ across countries, on average, the highest marginal impact of a rise in debt corresponds to the household and public sector, with an increase in private debt being more harmful in peripheral than in central countries; in contrast, the average effect of a rise in public debt does not differ between these two groups of countries. As for the effects of a debt increase beyond the turning point estimated in the threshold model, our findings indicate that the highest marginal impact corresponds to the household sector.

Modeling Extremal Events: A Case Study of the Kenyan Public Debt

Kenya’s public debt is sharply increasing and there are fears that in the long run, the situation in the country may, perhaps, be gravitating towards the boundaries of debt distress. This has been occasioned by the ever rising fiscal deficit as a result of high expenditure appetite and poor performance of tax revenue. In addition to that is the recent surge in mega infrastructure development which is anticipated to continue triggering uptake, and piling of more public debt. To model this phenomenon, this study has applied the Extreme Value Theory in modeling the public debt where Generalized Pareto Distribution has been used and subsequently, Value-at-Risk determined. Generally, the differenced debt stock data has been modeled by fitting the Generalized Pareto Distribution and a debt sustainability threshold has been determined as 1.263. This is interpreted to imply that the prevailing year's borrowing should not occasion a rise in public debt beyond 26.3 per cent of the previous year's level. Specifically, both the unconditional and conditional Value-at-Risk has been ascertained as 1.263 and 0.957 respectively, at α = 0.05 level of significance, which is the maximum tolerable debt limit. Further, by applying the loss function, it has been established that among the two methods, conditional Value-at-Risk is the efficient model for measuring public debt risk, connoting that at α = 0.05, the current year's borrowing, say, should occasion a public debt reduction by 4.27 per cent from the previous one for the country to vacillate within the debt sustainability realms. Finally, it is recommended that a further study be conducted by computing and using Net Present Value of debt indicators since the ones used in this study are aggregated in nominal terms.

FRBM Act- One Size Fit All: Not an Optimum Strategy A Case Study of Haryana and Punjab

The fiscal crisis in the late 1990s caused rise in public debt in most of the Indian states forcing states to go for new borrowings even to finance revenue deficit (RD). To control this situation s Fiscal responsibility and budget management (FRBM) Act was enacted. The FRBM Act does not allow variation in underlying economic factors of the states. In the present paper an endeavor is made to evaluate the usefulness of various constraints on state governments fiscal management. Evidences from Haryana and Punjab show less rigid FRBM Act framework giving flexibility to states would be better option than the existing one.

An analysis of public debt levels in both developed and developing countries

The main objective of this paper is pointing out the importance of high public debt problem as well as the underlying causes that have led to rise in public debt in selected countries. The following methods were used in this research: historical method, deduction, generalization methods and statistical methods. By observing data on ten year trend of public debt in selected countries, we have concluded that there is a trend of increase in public debt, as a percentage of the gross domestic product of a country. Each of the analyzed countries (Canada, United Kingdom, Greece, Argentina and Serbia) has specific causes that have led to rise in public debt, but the main cause that is common to all countries is the excessive consumption of state organs and reduction of tax revenues that has arisen as a result of reduced economic activity due to the global economic crisis in recent years. By analyzing the data on the trend of public debt in the observed countries in the period from 2003. to 2014., we have concluded that the problem can be solved by increasing gross domestic product, or reducing government spending.

Financial Globalization, Inequality, and the Rising Public Debt

During the last three decades government debt has increased in most developed countries. During the same period we have also observed a significant liberalization of international financial markets. We propose a multicountry model with incomplete markets and show that governments may choose higher levels of debt when financial markets become internationally integrated. We also show that public debt increases with the volatility of uninsurable income (idiosyncratic risk). To the extent that the increase in income inequality observed in some industrialized countries has been associated with higher idiosyncratic risk, the paper suggests another potential mechanism for the rise in public debt. (JEL D31, E62, F65, H63)

"The Impact Of Fiscal Policy On Gross Domestic Product In The European Union. A Panel Var Model Aproach "

In our research, we intend to observe the influence of fiscal policy together with the interest rate and inflation rate on economic growth in the European Union member states. Therefore, our goal is to identify the impact of the main instruments of fiscal policy, using an unrestricted panel VAR model, on the evolution of GDP. In this way we can understand what is the response of the GDP of the member states of EU 27 to the evolution of public debt, government deficit, government spending, interest rate and inflation. Using impulse response functions we have seen that private consumption has a positive influence on GDP, the rise in public debt has a negative influence on the evolution of GDP, government expenditure has an alternating influence that turns from positive in the first half of the observation period into negative in the second, the interest rate has a strong negative influence while the inflation rate has a positive influence on the evolution of GDP.

Foreign debt versus domestic debt in the euro area

The aftermath of the 2008 financial crisis has led to a sharp rise in public debt throughout the developed world. The problem is particularly acute within the euro area, where several governments needed financial assistance from the International Monetary Fund and the European Stability Mechanism. This paper argues that public debt poses much greater problems when it is owed to foreigners, i.e. when it constitutes foreign debt. This view implies that the key to overcoming the euro crisis is in the external adjustment, not the fiscal adjustment. Another implication is that in a crisis a strong fiscal adjustment is desirable, not because it can immediately reduce the public debt/GDP ratio, but because it reduces domestic absorption and thus reinforces the external adjustment. Copyright 2013, Oxford University Press.