Journal Article


Dynamic stability of public debt : evidence from the Eurozone countries

Abstract

This paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to the pandemic, dynamic instability prevailed and persisted in the evolution of public debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39%, and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability condition reverses course when economic growth is higher than 3.4%. The main policy implication drawn from the results is that low interest rates can create a self-reinforcing loop of high debt, which itself is a serious matter for public authorities when designing economic policies.

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Authors

Katsikas, Epameinondas
Laopodis, Nikiforos T.
Spanos, Konstantinos

Oxford Brookes departments

Oxford Brookes Business School

Dates

Year of publication: 2023
Date of RADAR deposit: 2023-12-21


Creative Commons License This work is licensed under a Creative Commons Attribution 4.0 International License


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