Prague Economic Papers 2022, 31(1):58-78 | DOI: 10.18267/j.pep.790

Role of Uncertainty in Debt-Growth Nexus

Mindaugas Butkus ORCID...a, Diana Cibulskiene ORCID...a, Lina Garsviene ORCID...a, Janina Seputiene ORCID...a
a Vilnius University Siauliai Academy, Siauliai, Lithuania

This paper analyses uncertainty as one of the factors that affect the public debt-growth nexus. We put forward a hypothesis that uncertainty mediates the effect of public debt on economic growth. The empirical examination of the mediating effect is based on the neoclassical growth equation and consistent with specifications previously used to analyse the sources of heterogeneity in the debt-growth relationship. Since one part of the uncertainty is financial risk, which is closely related to the financial sector stability, we use interest rate spread as a main variable, and the risk premium on lending as an alternative one to proxy financial risk and thus, to some extent, uncertainty. Our results show that lower uncertainty is related to a bigger positive effect of debt on growth and a higher turning point in the debt-growth nexus. On the contrary, higher uncertainty leads to a lower positive and more considerable negative effect of debt on growth in both linear and quadratic specifications.

Keywords: Debt-growth nexus, uncertainty, interest rate spread, risk premium, financial risk
JEL classification: E43, H63, H68, O40

Received: May 19, 2021; Revised: December 8, 2021; Accepted: January 10, 2022; Published: March 1, 2022  Show citation

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Butkus, M., Cibulskiene, D., Garsviene, L., & Seputiene, J. (2022). Role of Uncertainty in Debt-Growth Nexus. Prague Economic Papers, 31(1), 58-78. doi: 10.18267/j.pep.790
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