Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter?

  • Filip Ostrihoň Institute of Economic Research, Slovak Academy of Sciences, Slovakia
  • Mária Širaňová Institute of Economic Research, Slovak Academy of Sciences, Slovakia http://orcid.org/0000-0002-1825-0097
  • Menbere Workie Tiruneh Institute of Economic Research, Slovak Academy of Sciences, Slovakia, and Webster Vienna, Private University, Austria

Abstract

This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members’ growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals.

Keywords: Debt overhang, Debt threshold level, Panel data, Interaction effects, Quantile regression.

JEL: F34, F43, H63.

How to Cite
Ostrihoň F., Širaňová M., & Workie Tiruneh M. (2022). Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter? Panoeconomicus, Advance online publication, 1-27. doi:10.2298/PAN181114007O
Section
Original scientific paper