| By: |
Osińska, Magdalena;
Kufel, Tadeusz;
Blazejowski, Marcin;
Kufel, Pawel |
| Abstract: |
In recent economic literature it has been emphasized that across both advanced
countries and emerging markets, high levels of debt-to-gross domestic product
(GDP) ratio (90% and above) are associated with notably lower growth outcomes.
On the other hand, much lower levels of external debt-to-GDP ratio (60% and
below) are associated with adverse outcomes for emerging market growth. These
findings have been broadly cited and used in practice. On the other hand,
there is an opposite evidence, such that the initial level of debt-to-GDP
ratio has no impact on economic growth rate. Taking both viewpoints into
account, we propose to employ a time series-based nonlinear mechanism in the
threshold autoregression form in order to examine the possible relationship
between economic growth rate and its potential determinants included the
mentioned debt-to GDP indicator. The originality of the study is that it
employs threshold variables instead of exogenous variables and time-series
data instead of panel data to reveal the economic instruments that have
determined the business cycle in European countries for the last 2 decades
-starting from 1995. The purpose of the study is to check the mechanism of
growth (measured in terms of GDP growth rate and industrial production growth
rate) depending on several important macroeconomic variables, such as public
debt, rate of inflation, interest rate, and rate of unemployment with the
level of growth itself serving as the threshold variable. We propose an
efficient methodology for seeking the best specification of threshold
autoregression model in terms of both goodness of fit and parsimony of
parametrization. The data (quarterly and monthly) applied in the research
cover the time period from the beginning of 1995 to the end of 2013. Such a
long period is interesting because it allows investigation of the mechanism of
growth under two different economic policy models. We identify that the
exogenous monetary mechanism played an important role in diagnosing the phases
of business cycle in most European economies which is in line with liberal
economic policy dominating in the observed period. The initial level of
debt-to-GDP ratio as its increase within the recession period was of no value
for the economic growth pattern. |
| Keywords: |
threshold models, economic growth, public debt, economic policy, 2007—2009 recession |
| JEL: |
C24 C87 E32 |
| Date: |
2016 |
| URL: |
http://d.repec.org/n?u=RePEc:pra:mprapa:71476&r=fdg |