Political economy of public debt, growth and interest rates in the context of the Corona crisis (project)

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Political economy of public debt, growth and interest rates in the context of the Corona crisis

Client/Funding Institution

Anniversary Fund of the Oesterreichische Nationalbank

Abstract

The macroeconomic consequences of the Corona crisis have triggered an increase in public debt in the EU’s Member States. This research project makes two contributions to a better understanding of the implications for economic policy. First, we develop the first quantitative analysis of the literature concerning the effect of public debt on economic growth. Using the statistical and econometric toolbox of meta-analysis and meta-regression analysis, we investigate whether there is evidence for a threshold effect of the public-debt-to-GDP ratio, whereby economic growth could decline significantly if such a threshold is exceeded. Second, the project develops an analysis of government debt against the background of changes in the interest rate environment. Specifically, we analyse the role of the difference between long-term interest rates on government bonds and GDP growth rates for the dynamics of government debt and fiscal policy.

Funded by the Anniversary Fund of the Oesterreichische Nationalbank (Project No. 18699).