Dynamic Stability of Public Debt: Evidence from the Eurozone Countries
This paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, i...
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| Format: | Article |
| Language: | English |
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MDPI AG
2023-12-01
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| Series: | International Journal of Financial Studies |
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| Online Access: | https://www.mdpi.com/2227-7072/11/4/149 |
| _version_ | 1797358056622784512 |
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| author | Epameinondas Katsikas Nikiforos T. Laopodis Konstantinos Spanos |
| author_facet | Epameinondas Katsikas Nikiforos T. Laopodis Konstantinos Spanos |
| author_sort | Epameinondas Katsikas |
| collection | DOAJ |
| description | This paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to the pandemic, dynamic instability prevailed and persisted in the evolution of public debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39%, and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability condition reverses course when economic growth is higher than 3.4%. The main policy implication drawn from the results is that low interest rates can create a self-reinforcing loop of high debt, which itself is a serious matter for public authorities when designing economic policies. |
| first_indexed | 2024-03-08T14:54:18Z |
| format | Article |
| id | doaj.art-5818e75e8c5047c29246a7f9dc2e4da9 |
| institution | Directory Open Access Journal |
| issn | 2227-7072 |
| language | English |
| last_indexed | 2024-03-08T14:54:18Z |
| publishDate | 2023-12-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | International Journal of Financial Studies |
| spelling | doaj.art-5818e75e8c5047c29246a7f9dc2e4da92024-01-10T17:49:21ZengMDPI AGInternational Journal of Financial Studies2227-70722023-12-0111414910.3390/ijfs11040149Dynamic Stability of Public Debt: Evidence from the Eurozone CountriesEpameinondas Katsikas0Nikiforos T. Laopodis1Konstantinos Spanos2Business School, University of Kent, Canterbury, Kent CT2 7NZ, UKSchool of Business & Economics, The American College of Greece, Agia Paraskevi, 15342 Athens, GreeceBusiness School, Oxford Brookes University, Headington, Oxford OX3 0BP, UKThis paper investigates the dynamic stability of public debt and its solvency condition in the face of crisis periods (1980–2021) in a sample of 11 euro-area countries. The focus is on the feedback loop between the dynamic stability of public debt and interest rates, discounted by economic growth, in conjunction with budget deficits during tranquil and turbulent periods. Using the GMM panel dynamic model, the results show that dynamic stability was the case before the global financial crisis (GFC), while from GFC to the pandemic, dynamic instability prevailed and persisted in the evolution of public debt. Furthermore, panel threshold estimates show that dynamic instability of debt starts to violate the solvency condition when the borrowing cost is above 3.29%, becomes even stronger when it is above 4.39%, and exerts even more pressure when the level of debt is greater than 91%. However, the debt sustainability condition reverses course when economic growth is higher than 3.4%. The main policy implication drawn from the results is that low interest rates can create a self-reinforcing loop of high debt, which itself is a serious matter for public authorities when designing economic policies.https://www.mdpi.com/2227-7072/11/4/149debt dynamicssolvencyprimary balancepanel thresholds |
| spellingShingle | Epameinondas Katsikas Nikiforos T. Laopodis Konstantinos Spanos Dynamic Stability of Public Debt: Evidence from the Eurozone Countries International Journal of Financial Studies debt dynamics solvency primary balance panel thresholds |
| title | Dynamic Stability of Public Debt: Evidence from the Eurozone Countries |
| title_full | Dynamic Stability of Public Debt: Evidence from the Eurozone Countries |
| title_fullStr | Dynamic Stability of Public Debt: Evidence from the Eurozone Countries |
| title_full_unstemmed | Dynamic Stability of Public Debt: Evidence from the Eurozone Countries |
| title_short | Dynamic Stability of Public Debt: Evidence from the Eurozone Countries |
| title_sort | dynamic stability of public debt evidence from the eurozone countries |
| topic | debt dynamics solvency primary balance panel thresholds |
| url | https://www.mdpi.com/2227-7072/11/4/149 |
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