The Role of Government Debt in Economic Growth

ISEG-UTL Economics Department Working Paper No. 16/2014/DE/UECE

45 Pages Posted: 3 Oct 2014

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

José Alves

UECE - Research Unit on Complexity in Economics; ISEG - ULisboa; REM - Resarch in Economics and Mathematics

Date Written: October 2, 2014

Abstract

We study the effect of public debt on economic growth for annual and 5-year average growth rates, as well as the existence of non-linearity effects of debt on growth for 14 European countries from 1970 until 2012. We also consider debt-to-GDP ratio interactions with monetary, public finance, institutional and macroeconomic variables. Our results show a negative impact of -0.01% for each 1% increment of public debt, although debt service has a 10 times worse effect on growth. In addition, we find average debt ratio thresholds of around 75%. Belonging to the Eurozone has a detrimental effect of at least -0.5% for real per capita GDP, and the banking crisis is the most harmful crisis for growth.

Keywords: government debt, economic growth, thresholds

Suggested Citation

Afonso, António and Alves, José, The Role of Government Debt in Economic Growth (October 2, 2014). ISEG-UTL Economics Department Working Paper No. 16/2014/DE/UECE, Available at SSRN: https://ssrn.com/abstract=2468805 or http://dx.doi.org/10.2139/ssrn.2468805

António Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
Lisbon, 1248-078
Portugal
+351 21 392 5985 (Phone)
+351 21 396 6407 (Fax)

HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

Rua Miguel Lupi 20
Lisbon, 1249-078
Portugal
+351-213 925 912 (Phone)
+351-213 971 196 (Fax)

HOME PAGE: http://uece.rc.iseg.ulisboa.pt/

ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

José Alves

UECE - Research Unit on Complexity in Economics ( email )

ISEG/UTL, Rua Miguel Lupi 20
Lisboa, 1249-078
Portugal

ISEG - ULisboa ( email )

Rua do Quelhas 6
LISBOA, 1200-781
Portugal

REM - Resarch in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

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