Nonfinancial debt and economic growth in euro-area countries

In this paper we analyze the effects of all sources of the accumulation of non-financial debt (household, corporate as well as government) on economic growth in 10 Euro-area countries, both central (Austria, Belgium, Finland, France, Germany and the Netherlands) and peripheral countries (Greece, Italy, Portugal and Spain), during the 1980-2015 period. To this end, we make use of three models (a baseline, an asymmetric and a threshold model) based on the empirical growth literature augmented by debt to assess whether a debt change has an impact on growth over and above other determinants, treating the different types of borrowers separately. By exploring the time series dimension in order to properly account for the historical experience of each country in the sample, we aim to detect potential heterogeneities in the relationship across euro area countries. Our results, based on data from the World Bank’s World Development Indicators, with both the baseline and the asymmetric models suggest that although the effects on non-financial debt accumulation clearly differ across countries, on average, the highest marginal impact of a rise in debt corresponds to the household and public sector, with an increase in private debt being more harmful in peripheral than in central countries; in contrast, the average effect of a rise in public debt does not differ between these two groups of countries. As for the effects of a debt increase beyond the turning point estimated in the threshold model, our findings indicate that the highest marginal impact corresponds to the household sector.