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

Authors

  • 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

DOI:

https://doi.org/10.2298/PAN181114007O

Keywords:

Debt overhang, Debt threshold level, Panel data, Interaction effects, Quantile regression

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.

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Published

2022-03-26

How to Cite

Ostrihoň, F., Širaňová, M., & Workie Tiruneh, M. (2022). Reassessing the Public Debt Threshold in the EU: Do Macroeconomic Conditions Matter?. Panoeconomicus, 1–27. https://doi.org/10.2298/PAN181114007O

Issue

Section

Original scientific paper