Financial Stress, Sovereign Debt and Economic Activity

Christian ProañoChristian SchoderWilli Semmler
Written By SCEPA

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This paper analyzes how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the state of the financial market.

A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifi- cations from the financial sector. For thirteen industrialized economies we study empirically the relationship between the GDP-growth rate, the debt-GDP ratio, and the financial stress index for the period 1980-2010 using quarterly data and dynamic single-country and dynamic panel threshold regression methods.

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