It's the Debt-Growth Nexus Again – Evidence from a Long Panel of Regional-Government Liabilities

22 Pages Posted: 22 Jul 2014

See all articles by Timo Mitze

Timo Mitze

Gesellschaft für Okonomische Regionalanalysen (GEFRA)

Florian Matz

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

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Date Written: March 1, 2013

Abstract

In this paper, we study the long- and short-run relationship between regional public debt and economic performance for a sample of German federal states over the period of four decades (1970-2010). By choosing a sample of regional entities with comparable institutional settings, we complement the large literature on the debt-growth nexus based on heterogeneous cross-country samples. We estimate a dynamic error correction model that accounts for slope heterogeneity among cross-sections and the presence of unobserved common factors. While – in line with the Keynesian view – our findings hint at a non-linear inverted U-shape relationship between changes in the public debt intensity and economic growth in the short-run, we get strong statistical evidence for linear negative relationship between regional public depth and per capita GDP in the long-run. By means of a simple though experiment, we show that these negative longrun effects are not negligible for the size of interregional differences in per capita GDP levels and are in line with most international evidence on the detrimental growth effects of high public debt levels. Finally, these results also underline the need for effective fiscal rules at the federal state level in Germany.

Keywords: government debt, economic growth, German states, panel data, unobserved

JEL Classification: C23, R11, R50, E62

Suggested Citation

Mitze, Timo and Matz, Florian, It's the Debt-Growth Nexus Again – Evidence from a Long Panel of Regional-Government Liabilities (March 1, 2013). Ruhr Economic Paper No. 406, Available at SSRN: https://ssrn.com/abstract=2469135 or http://dx.doi.org/10.2139/ssrn.2469135

Timo Mitze (Contact Author)

Gesellschaft für Okonomische Regionalanalysen (GEFRA) ( email )

Salzmannstr. 152
48159 Muenster
Germany

Florian Matz

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

Hohenzollernstr. 1-3
Essen, 45128
Germany

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