Public debt and economic growth: is there a causal effect?

Available from: 
October 2013
Paper author(s): 
Ugo Panizza (The Graduate Institute, Geneva)
Andrea Presbitero (Universita' Politecnica delle Marche)
Macroeconomics - Economic growth - Monetary Policy

This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction.


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Research section: 
Lacea 2013 annual meeting
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