Katsikas, E.; Laopodis, N.T.; Spanos, K. Dynamic Stability of Public Debt: Evidence from the Eurozone Countries. Int. J. Financial Stud.2023, 11, 149.
Katsikas, E.; Laopodis, N.T.; Spanos, K. Dynamic Stability of Public Debt: Evidence from the Eurozone Countries. Int. J. Financial Stud. 2023, 11, 149.
Katsikas, E.; Laopodis, N.T.; Spanos, K. Dynamic Stability of Public Debt: Evidence from the Eurozone Countries. Int. J. Financial Stud.2023, 11, 149.
Katsikas, E.; Laopodis, N.T.; Spanos, K. Dynamic Stability of Public Debt: Evidence from the Eurozone Countries. Int. J. Financial Stud. 2023, 11, 149.
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.
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
The commenter has declared there is no conflict of interests.
Comment:
The paper contains interesting findings of how dynamic stability of debt turns to instability and violates the solvency condition due to low interest rates and temptation to governments to spend more. It is also valuable to know how debt dynamics affects debt sustainability at regular and stressful times. However, an additional investigation of possible threshold effects for inflation, conditional to interest rates, on debt could have been included, thus investigating all possible discount factors for debt.
Commenter:
The commenter has declared there is no conflict of interests.