Year
2013
Abstract
This article argues that in Euro-area economies, where the European Central Bank (ECB) cannot bail out financially distressed governments, the spending multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the last 16 years shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt; in particular, when the public debt exceeds 150% of GDP, the growth impact of the deficit might turn negative.
VRANCEANU, R. et BESANCENOT, D. (2013). The Spending Multiplier in a Time of Massive Public Debt: The Euro-Area Case. Applied Economics Letters, 20(8), pp. 758-762.