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POLIS Working Papers - Working paper n. 198

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

april 2012


Abstract

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.

JEL Classification numbers

F33, F34, F35, O11

Keywords

Government Debt, Growth, OECD countries

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Periodico mensile on-line "POLIS Working Papers" - Iscrizione n.591 del 12/05/2006 - Tribunale di Alessandria
ISSN: 2038-7296


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