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Public Capital Expenditure and Debt Dynamics: Evidence from the EU

Bhatt Hakhu, Antra and Piergallini, Alessandro and Scaramozzino, Pasquale (2016) 'Public Capital Expenditure and Debt Dynamics: Evidence from the EU.' Politica Economica. Journal of Economic Policy, XXXII (3). pp. 555-574.

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Abstract

This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries in 1980-2013. We find robust evidence of a negative cointegrating relation, whereby increases in the capital expenditure-GDP ratio cause reductions in the long-run debt-GDP ratio. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. The findings appear to give support to the view, consistent with the “golden rule of public finance”, that EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.

Item Type: Articles
Keywords: Fiscal sustainability, EU, panel cointegration, public expenditure, public debt
SOAS Departments & Centres: Faculty of Law and Social Sciences > School of Finance and Management
Faculty of Law and Social Sciences > School of Finance and Management > Centre for Financial and Management Studies (CeFiMS)
Faculty of Law and Social Sciences
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HG Finance
H Social Sciences > HJ Public Finance
ISSN: 11209496
DOI (Digital Object Identifier): 10.1429/85011
Depositing User: Pasquale Scaramozzino
Date Deposited: 27 Nov 2016 16:40
URI: http://eprints.soas.ac.uk/id/eprint/23193

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