Saturday, 30 March 2019: 11:30 AM
After the end of the 2008 global financial crisis, the low interest rates in the US led many emerging countries to borrow in dollars. As the dollar rises, it becomes more expensive for these countries to repay their debt service costs in hard currency. Furthermore, the recent debt crisis in Greece brings into the discussion the importance of public debt and its potential impact on economic growth inside European countries. While the conventional wisdom is that debt may stimulate aggregate demand and output in the short run (e.g. Barro (1990) or Elmendorf and Mankiw (1999)), in the long run it may crowd out capital and reduce output (e.g., Reinhart and Rogoff, 2010; Cechetti et al., 2011; Salotti and Trecroci, 2016). Additionally, the literature provides many reasons to explain why the higher the level of public debt, the more negative its effects (e.g., Pescatari and Panizza, 2014). The paper aims to investigate whether linear or different nonlinear specifications of the debt-growth nexus constitute a ‘short-run or long-run equilibrium” in European emerging markets (EEM) during the period 1995-2019. To this end, the paper uses linear dynamic panel data, including the Pooled Mean Group (PMG) estimator of Pesaran, Shin, and Smith (1999) and non-linear panel models, including the Hansen (1999) or Gonzales et al. (2015) approaches. The preliminary results suggest that the harmful impact of debt on economic growth does not occur beyond the same threshold and with the same intensity in all EEM. In terms of policy implications, the results suggest that the pace of fiscal adjustments should be different across these emerging countries.