Effectiveness of fiscal policy measures in different public debt regimes
Abstract
The aim of the research is to illustrate how the degree of effectiveness of fiscal policy measures varies depending on the level of public debt within a group of Central and Eastern European (CEE) states. To this end, a T-SVAR (Threshold Structural Vector Autoregressive) model was implemented, based on two regimes, calibrated as a function of the evolution of public debt. The results illustrate that, in most of the countries analysed, increasing government expenditure generates a stronger increase in economic growth under the low public debt regime in comparison with the situation at the level of the high public debt regime. Thus, the effectiveness of fiscal policy measures declines as the level of government debt rises. Another result obtained within the analysis highlights that the positive effect of public debt reduction on economic growth is more strongly felt in the higher public debt regime than under a low public debt regime. On the basis of these results, it is recommended that the CEE countries continue their efforts to reduce public debt in order to increase the effectiveness of fiscal policy measures.
Keyword : fiscal policy, public debt, Threshold Structural Vector Autoregressive, Central and Eastern Europe, government expenditure, economic growth
How to Cite
Gherghina, R., Grecu, R.-A., Constantinescu, C. M., Duca, I., Postole, M. A., & Ciobănașu, M. (2024). Effectiveness of fiscal policy measures in different public debt regimes. Journal of Business Economics and Management, 25(4), 628–646. https://doi.org/10.3846/jbem.2024.21996
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Coman (Nuţă), A. C., Lupu, D., & Nuţă, F. M. (2023). The impact of public education spending on economic growth in Central and Eastern Europe. An ARDL approach with structural break, Economic Research-Ekonomska Istraživanja, 36(1), 1261–1278. https://doi.org/10.1080/1331677X.2022.2086147
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Easterly, W., & Rebelo, S. (1993). Fiscal policy and economic growth. Journal of Monetary Economics, 32(3), 417–458. https://doi.org/10.1016/0304-3932(93)90025-B
Eberhardt, M. M., & Presbitero, A. (2013). This time they are different: heterogeneity and nonlinearity in the relationship between debt and growth (Working Paper No. 2013/248). International Monetary Fund. https://doi.org/10.5089/9781484309285.001
Égert, B. (2015). Public debt, economic growth and nonlinear effects: Myth or reality?. Journal of Macroeconomics, 43, 226–238. https://doi.org/10.1016/j.jmacro.2014.11.006
Elbadawi, I. A. (1997). 5 Debt overhang and economic growth in Sub-Saharan Africa. In External finance for low-income countries. International Monetary Fund. https://doi.org/10.5089/9781451957198.071
Elmendorf, D. W., & Mankiw, N. G. (1999). Government debt. Handbook of Macroeconomics, 1, 1615–1669. https://doi.org/10.1016/S1574-0048(99)10038-7
Elmeskov, J., & Sutherland, D. (2012). Post-crisis debt overhang: Growth implications across countries. SSRN. https://doi.org/10.2139/ssrn.1997093
Eminidou, S., Geiger, M., & Zachariadis, M. (2023). Public debt and state-dependent effects of fiscal policy in the euro area. Journal of International Money and Finance, 130, Article 102746. https://doi.org/10.1016/j.jimonfin.2022.102746
Lau, E., de Alba, J. M., & Liew, K. H. (2022). Debt and economic growth in Asian developing countries. Economic Analysis and Policy, 76, 599–612. https://doi.org/10.1016/j.eap.2022.09.011
Gale, W. G., & Orszag, P. R. (2003). Fiscal follies: The real budget problem and how to fix it. The Brookings Review, 21(4), 7–11. https://doi.org/10.2307/20081125
Glomm, G., & Ravikumar, B. (1997). Productive government expenditures and long-run growth. Journal of Economic Dynamics and Control, 21(1), 183–204. https://doi.org/10.1016/0165-1889(95)00929-9
Gómez-Puig, M., Sosvilla-Rivero, S., & Martinez-Zarzoso, I. (2022). On the heterogeneous link between public debt and economic growth. Journal of International Financial Markets, Institutions and Money, 77, Article 101528. https://doi.org/10.1016/j.intfin.2022.101528
Greiner, A. (2011). Economic growth, public debt and welfare: Comparing three budgetary rules. German Economic Review, 12(2), 205–222. https://doi.org/10.1111/j.1468-0475.2010.00516.x
Gupta, S., Clements, B., Baldacci, E., & Mulas-Granados, C. (2005). Fiscal policy, expenditure composition, and growth in low-income countries. Journal of International Money and Finance, 24(3), 441–463. https://doi.org/10.1016/j.jimonfin.2005.01.004
Hemming, R., & Ter-Minassian, T. (2003). VI public debt dynamics and fiscal adjustment. Managing Financial Crises, 65. https://www.elibrary.imf.org/display/book/9781589062085/C6.xml?tabs=fulltext
Heylen, F., Hoebeeck, A., & Buyse, T. (2013). Government efficiency, institutions, and the effects of fiscal consolidation on public debt. European Journal of Political Economy, 31, 40–59. https://doi.org/10.1016/j.ejpoleco.2013.03.001
Imbs, J., & Ranciere, R. (2005). The overhang hangover (Vol. 5210). World Bank Publications. https://doi.org/10.1596/1813-9450-3673
Jora, O. D., Iacob, M., & Crețan, G. C. (2017). Is there a market for statehood (or ought it to be)? The (im)perfect and the (un)free competition among sovereignties. In İ. Șiriner, Ș. A. Koç, & H. Yildiz (Eds.), Current debates in economics & econometrics, Vol. 2. IJOPEC Publication. file:///C:/Users/Administrator/Downloads/9781912503032.pdf.
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Kose, M. A., Nagle, P. S. O., Ohnsorge, F., & Sugawara, N. (2021). What has been the impact of COVID-19 on debt? Turning a wave into a tsunami (CEPR Discussion Paper No. DP16775). https://doi.org/10.2139/ssrn.3980291
Kourtellos, A., Stengos, T., & Tan, C. M. (2013). The effect of public debt on growth in multiple regimes. Journal of Macroeconomics, 38, 35–43. https://doi.org/10.1016/j.jmacro.2013.08.023
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