Economic Growth and Debt: An Empirical Analysis

Constantinos KoliosTerm Paper PresentationEconomics Department

University of PiraeusJune 06, 2014

Countries were selected based on the high level of net trade in goods and services (BoP, current international U.S.$)

CanadaMalaysiaNetherlandsNorwayGermanySingapore

Motivation

Motivation

Canada: Canada has become a model of fiscal stability

as the government has posted surpluses every fiscal year from 1996 to the 2008 recession. Germany:

2000-2004 had steady GDP growth and the high rate of unemployment led to an increase of

the retirement age 2004-2008 leading exporter. 2009 Global economic crisis - modernization of

eastern Germany (70 billions per year). Malaysia:

2001 Ethnic clashes Malays-Ethnic Indians ( grGDP)2004 Natural disaster(tsunami)2008 Economic downturn due to political clashes.

Motivation

Netherlands: 2002 euro replaced guilder. The prime

minister quit. 2002-2007 Gradual development 2007-2008 global economic crisis.

Norway: 2000-2007 Norway had a steady growth rate

and was evaluated by Moody’s with AAA (highest credit rating)2008 was affected by the global economic

crisis. Singapore:

2000-2003 Asian countries came through the 1997 financial crisis 2004-2007 had a stable annual growth rate of

8% 2008- global economic crisis.

Motivation

Motivation

Note : Debt in millions (2005), US Dollars

Motivation

Note: GDP growth is calculated with GDP in current prices (international US $)

Literature ReviewPaper Question Data FindingsChecherita-Westphal and Rother, 2012

Impact of government debt on economic growth

12 Countries Euro area 1970-2010

Debt has a negative impact on long term growth

Reinhart and Roggoth, 2010

Growth in a time of Debt

44 Countries About 200 years

weak relationship between debt and GDP growth

Cunningham, 1993

The effects of debt burden on economic growth in heavily indebted developing nations

16 Countries Heavily indebted developing nations 1971-1979

negative relationship between the growth of and economic growth

Schclarek, 2004 Debt and Economic Growth in Developing and Industrial Countries

83 Countries Developing and Industrial Economies 1970-2002

negative relationship between total external debt levels and growth rates which is caused by the levels of public external debt

The purpose of this presentation is to analyze the regression of economic growth in relation to the Government Public Debt behavior.

Purpose

We study the determinants of economic growth with special emphasis on public debt (Central Government Public Debt) along with the Gross Saving (% GDP) and the growth rate of Labor Force.

Contribution

git+k = α + βln(GDP/cap)it + γ1 debt_sqit + γ2 debtit + δ saving/gfcfit + φ pop.growthit + other controls (fiscal; openness; interest rate) + μi + νt + εit

Note: Based on empirical Neoclassical Model of Growth, Solow 1957; Barro 1991 and work on Checherita-Westphal and Rother, European Economic

Review, 2012

Model

DataCountries: 6, Canada, Malaysia, Netherlands, Norway, Germany, SingaporePeriod: 2000-2010

legend: * p<0.05; ** p<0.01; *** p<0.001 rho .48279582 .45377373 .48279582 sigma_e 2.6814646 1.8833943 2.6814646 sigma_u 2.5907339 1.7166219 2.5907339 r2_w .19152959 .67154066 .19152959 r2_b .452698 .34828472 .452698 r2_o .2276216 .55525085 .2276216 r2 .34460227 .43847206 .73160941 .34460227 .19152959 .67154066 .19152959 N 60 60 60 60 60 60 60 _cons -21.232794** -40.942385* -16.753914*** -21.232794* -38.200517* -12.562275 -38.200517* _IYEAR_11 1.3454521 2.9249183* _IYEAR_10 -6.3154293*** -4.6191432*** _IYEAR_9 -2.9133138* -1.6281907 _IYEAR_8 (omitted) .77077877 _IYEAR_7 -.10206824 .8322421 _IYEAR_6 -.63784243 .45624729 _IYEAR_5 .45616169 1.7373032 _IYEAR_4 -1.2719815 (omitted) _IYEAR_3 -1.1774724 .05859969 _IYEAR_2 -2.4990942* -1.6710911 _ICOUNTRY_6 -5.682253 _ICOUNTRY_5 -9.9526879** _ICOUNTRY_4 -2.9044788 _ICOUNTRY_3 (omitted) _ICOUNTRY_2 -1.2059315 grLabor .17380207 -.29156666 .30634825 .17380207 -.29156666 .07021985 -.29156666 lnDebt 1.7972366 -1.451081 1.9559877* 1.7972366 -1.451081 -2.0634974 -1.451081 lnSavings 5.5254564** 13.887056** 4.3181056*** 5.5254564*** 13.887056** 6.8993229 13.887056* ycap_2005 -.00006133 .00017538 -.00005846* -.00006133* (omitted) (omitted) (omitted) Variable POOLED_COEF POOLED_DVLS~Y POOLED_DVLS~R WLS_POOLED FE DVLS_FE_YEAR WLS_FE

Results – Various Estimators

legend: * p<0.05; ** p<0.01; *** p<0.001 rho 0 0 0 sigma_e 2.6814646 1.8833943 2.6814646 sigma_u 0 0 0 r2_w .10110245 .63296018 .10110245 r2_b .91755306 .95957285 .91755306 r2_o .34460227 .73160941 .34460227 r2 N 60 60 60 _cons -21.232794*** -15.408462** -21.232794*** _IYEAR_11 (omitted) _IYEAR_10 -7.6608814*** _IYEAR_9 -4.2587659*** _IYEAR_8 -1.3454521 _IYEAR_7 -1.4475203 _IYEAR_6 -1.9832945 _IYEAR_5 -.88929041 _IYEAR_4 -2.6174337* _IYEAR_3 -2.5229245* _IYEAR_2 -3.8445463** _ICOUNTRY_6 _ICOUNTRY_5 _ICOUNTRY_4 _ICOUNTRY_3 _ICOUNTRY_2 grLabor .17380207 .30634825 .17380207 lnDebt 1.7972366 1.9559877* 1.7972366*** lnSavings 5.5254564*** 4.3181056*** 5.5254564*** ycap_2005 -.00006133 -.00005846* -.00006133*** Variable RE DVLS_RE_YEAR WLS_RE

Results – Various Estimators

Note: Outliers estimated with Cook’s distance method

Robustness (10 obs)

RobustnessWithout outliers

With outliers

grGDP grGDP_hat

grGDP 1.0000grGDP_hat 0.5525 1.0000

grGDP grGDP_hat

grGDP 1.0000grGDP_hat 0.4771 1.0000

o grGDPit = -26,368 + 10,026lnSavingsit – (-1,87) (+3,00)

1,237lnDebtit + 0,085grLaborit + eit (-0,63) (+0,30)

Obs (n) : 56Prob > F = 0.0062R-sq (overall) = 0,3053

Final (Estimated) Model

The size of debt does not affect the GDP growth.

The gross savings has a high positive influence on GDP growth. For example 1 unit increase of gross savings will increase GDP growth by 10,206 units.

The initial GDP was omitted as a consequence of the Fixed-Effects model choice.

Conclusion

We need to investigate further :

the size of debt and its impact on the Economic growth.

the alteration of Labor Force on the GDP growth.

Caveats

Net Trade could be added as variable in order to improve the interpretation of our results.

More years and countries should be added.

More controls variables such as government spendings for R&D, educational level of Labor force, rate of openness.

Future Research

Checherita, C., Rother, P., “The impact of high and growing government debt on economic growth: An empirical investigation for the Euro Area”. European Central Bank Working Paper Series 2010, No 1237

Reinhart, C., Roggoth, K., “Growth in a time of Debt”. National Bureau of Economic Research 2010, Working Paper No 15639

Cunningham, R., “The effects of debt burden on economic growth in heavily indebted developing nations”. Journal of Economic Development 1993, 18(1)

Schclarek, A.,” Debt and Economic Growth in Developing and Industrial Countries”. 2004

References

Data available at: http://databank.worldbank.org/data/views/variableSelection/selectvariables.aspx?source=world-development-indicators (Accessed April 28 2014)

References

Αγιακλόγλου, Χ. και Μπένος, Θ. 2007. «Εισαγωγή στην Οικονομετρική Ανάλυση», Τόμος Β, Αθήνα: Εκδόσεις Γ. Μπένου

References (Greek bibliography)

Appendix

Appendix

Appendix

Appendix

Appendix

Appendix

Appendix

Appendix