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Public debt and economic growth in Spain, 1851–2013

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Abstract

In this paper we investigate the long-run relationship between public debt and economic growth in the Spanish economy for the period 1851–2013. We develop a cliometric analysis of the debt–growth nexus using novel time series methods. We find some support for a negative relationship between both variables, but no clear evidence of a debt threshold. The estimated long-run elasticity in a one-break model shows a tendency to decrease over time from a nonsignificant 0.011 to a −0.070, indicating that a 10 percentage increase in the public debt-to-GDP ratio is associated with 0.70 percentage points lower real economic growth. Indeed, we find for the first subsample (1851–1939) either “decoupling” or “saturation,” while in the second subsample (1940–2000) the long-run elasticity coefficient becomes negative and significant. When we extend our analysis up to 2013, we find a break in 1971 coinciding with the twilight of Franco’s dictatorship and the Spanish transition to democracy.

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Notes

  1. See, for example, Panizza and Presbitero (2013) for a recent review of the literature.

  2. Beyond some threshold some countries may be able to arrive to a reschedule of its debt or even some way of debt redemption program that allows new growth impetus.

  3. See Kourtellos et al. (2013).

  4. Estimation methods have also varied from OLS estimation, panel data estimations with fixed or random effects, Tobit estimations, or semi-parametric estimation. In addition, explanatory variables have also been augmented including lagged values, population density, locational variables, micro- or macro-variables, distributional variables, trade variables, as well as noneconomic variables such as literacy rates or political rights.

  5. Comín (2016) has stressed this issue when explaining the debt crisis in Spain; see pp. 280–286.

  6. Only recent studies, like Di Sanzo and Bella (2015) or Gómez-Puig and Sosvilla-Rivero (2015), cover the causality analysis and possible endogeneity in the estimation of the debt–growth nexus.

  7. Gómez-Puig and Sosvilla-Rivero (2015) being a remarkable exception.

  8. See Sect. 3 for further details.

  9. However, this simple analysis does not find any support of an inverted U-shaped figure (Debt Laffer curve).

  10. There is also the waste of talent from educated unemployed young people.

  11. See, for instance, the Stability and Growth Pact in the case of the euro area.

  12. The above analysis implies that a full assessment of fiscal sustainability requires a comprehensive approach where debt dynamics should capture the feedback effects between fiscal policies, the macroeconomy, and the financial sector.

  13. See Panizza and Presbitero (2013) and Tomova et al. (2013), for a review of the literature on this topic.

  14. The channels through which public debt is likely to have an impact on economic growth rate are seen to be private saving, public investment, total factor productivity, and sovereign long-term nominal and real interest rates. The estimated debt threshold of 90–100% of GDP, after which additional debt starts to have a negative impact on growth, is an average for the sample of 12 countries and it may go as low as 70% of GDP which suggests that for many countries public debt levels may already have detrimental impact on growth as the average public debt ratios are above the lower threshold.

  15. Preceding empirical literature has generated substantial criticism. Indeed, many studies risked spurious findings by ignoring that variables like debt and GDP per capita are likely non-stationary; moreover, studies considering the non-stationary nature of the variables still risked spurious findings by performing nonlinear (quadratic) transformations of a prospective non-stationary variable (GDP per capita growth); other more recent studies to date that have employed panel unit root and panel cointegration techniques have relied on methods that incorrectly assume that the cross sections are independent.

  16. Eichengreen et al. (2005) described the inability of emerging market countries to borrow in their own currencies as an original sin. Unfortunately, the recent experience has shown that more advanced economies are not immune to potential sovereign debt problems similar to those widely observed in less developed economies.

  17. See Comín (2016) pp. 129–132, 143–148 and 178–184 where this relevant issue is explained for different historical periods.

  18. The subscript b stands for “break” and the subscript f stands for “fixed” (across regimes).

  19. See, inter alia, Stock and Watson (1996, 1999, 2005) and Perron and Zhu (2005).

  20. See Carrion-i Silvestre et al. (2009) for more details.

  21. These tests are the \(MZ_{\alpha }^{GLS}\), \({\textit{MSB}}^{GLS}\), \({\textit{MZ}}_{t}^{GLS}\) and \({\textit{MP}}_{T}^{GLS}\). For the \({\textit{MZ}}_{\alpha }^{GLS}\) and \({\textit{MZ}}_{t}^{GLS}\) tests the null hypothesis is a unit root, while for the \({\textit{MSB}}^{GLS}\) and \(MP_{T}^{GLS}\) tests the null hypothesis is non-stationarity. See Ng and Perron (2001) and Perron and Rodríguez (2003) for more details.

  22. Modified information criteria suggested by Ng and Perron (2001) with the modification proposed by Perron and Qu (2007).

  23. See Ogaki and Park (1997) and Campbell and Perron (1991) for an extensive treatment of deterministic and stochastic cointegration.

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Acknowledgements

The authors acknowledge support from FUNCAS, MINECO (Project ECO2014-58991-C3-2-R), and GV (Project PROMETEOII/2014/053). The paper has been partially elaborated during a stay of C. Tamarit at Harvard University with the support from the European Commission (Project 542434-LLP-1-2013-1-ES-AJM-CL ). The usual disclaimer applies.

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  1. INTECO Joint Research Unit, Universidad de Valencia, Valencia, Spain

    Vicente Esteve

  2. Universidad de Alcalá, Alcalá de Henares, Spain

    Vicente Esteve

  3. INTECO Joint Research Unit, Universidad de Valencia, Avda. dels Tarongers, s/n, 46022, Valencia, Spain

    Cecilio Tamarit

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Esteve, V., Tamarit, C. Public debt and economic growth in Spain, 1851–2013. Cliometrica 12, 219–249 (2018). https://doi.org/10.1007/s11698-017-0159-8

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