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Dynamic Stability of Public Debt: Evidence from the Eurozone Countries

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02 November 2023

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03 November 2023

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Abstract
This paper investigates the dynamic stability of public debt and its solvency condition on the face of crises periods (1980-2021) in a sample of 11-euro area countries. The focus is on the feedback loop between dynamic stability of public debt and interest rates, discounted by the 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 pandemic, dynamic instability prevailed on the evolution of public debt. Moreover, dynamic instability exerted a highly persistent effect on the evolution of 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 is an issue for further research.
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Subject: Business, Economics and Management  -   Economics
Copyright: This open access article is published under a Creative Commons CC BY 4.0 license, which permit the free download, distribution, and reuse, provided that the author and preprint are cited in any reuse.
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