Public Debt and Growth in Europe: The Role of Institutions
DOI:
https://doi.org/10.18559/ymjd6924Keywords:
Dług publiczny, Wzrost gospodarczy, InstytucjeAbstract
This paper investigates the impact of public debt on the long-term growth of GDP per-capita in an «enlarged European Union» of 32 countries, over a period of 18 years starting in 1994. More precisely, it focuses on the non-linear relationship between debt and growth and the extent to which both the quality of institutions and the debt trajectory, in addition to its level, may modify the impact of debt on growth. Our main results are: (1) when no country specific factors are taken into account, the negative growth effect of indebtedness is reinforced as the debt-to-GDP ratio exceeds approximately 60% in countries outside the Euro Area, and 70% within the Euro area; (2) growth effects for debt trajectory seem larger than those for debt level; (3) country specific factors such as the quality of institutions and the origin of legal systems, modify the debt to growth relationship: the debt trajectory, and not only its level, significantly and negatively affects economic growth. The quality of institutions dampens this effect; (4) this negative effect is relevant only in countries whose legal systems have French or socialist roots.
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