Asymmetric impact of public debt on economic growth in selected EU countries

Abstract

The paper explores the asymmetric relation between public debt and economic growth in 13 EU countries in the period 1993 - 2013. A panel data model uncovers a linear relation between debt-to-GDP decrease and GDP growth, while the relation between the debt-to-GDP increase and GDP growth is defined by an inverted U-shaped curve (parabola) with the peak at a 64% debt-to-GDP ratio. We identified two main patterns in relations between debt-to-GDP and GDP growth: (i) hysteresis loop - country data trace the closed circle defined within the debt interval [53%, 113%] (Austria, Finland, Denmark) and (ii) debt trap - country debt-to-GDP ratio breaks the 113% level and indebtedness increase followed by the GDP fall is tracing the diverging tail of parabola (debt trap in Greece, Italy, Portugal).