Does Public Debt Produce a Crowding Out Effect for Public Investment in the EU? (R-13159)

The combination of the sovereign debt crisis that started in 2009 in the EU and the fiscal consolidation policies that were implemented as a result, has significantly hampered economic growth and inflated debt levels. This paper exploits a panel dataset for 26 EU countries between 1995 and 2015 to examine the extent to which increased levels of public debt have led to reduced public investments, the so-called 'debt overhang' hypothesis. We tackle the potential issue of reverse causality between debt and investment by using a GMM model, exploiting the instrumental variable approach based on the linear GMM estimator of Arellano & Bond (1991).

Keywords:PUBLIC ECONOMICS

Disciplines:International economics