AbstractsEconomics

Abstract : In this study, we use an up-to-date econometric method, namely the semiparametric IV estimator, to investigate the functional form of the government debt/GDP-growth relationship for OECD countries. The relationship, characterizing the effect of government debt/GDP levels on the production growth rate, is estimated through an augmented growth model specification for different sub-groups of OECD countries, over the 1971-2010 period. In accordance with previous empirical studies, we find evidence for strong heterogeneity across the estimated functional forms of the different sub-groups. Complex non-linearities best describe the relationship for the complete sample of OECD countries, while a clear inverted U-shaped functional form is depicted for the PIIGS (Portugal, Italy, Ireland, Greece and Spain) sub-group. Additionally, our results show that most of the non-linear patterns characterizing the functional form for the complete sample can be explained by the PIIGS sub-group. In fact, when we exclude the PIIGS countries from the OECD sample, the estimated debt/GDP-growth relationship becomes almost linear and positive, a result that holds even at high government debt-to-GDP levels. We confirm the suitability of the semiparametric IV estimator, for this specific relationship estimation, with two related specification tests. Advisors/Committee Members: Richard, Patrick.