Template-type: ReDIF-Paper 1.0
Author-Name: Mathieu Grobéty
Author-Name-First: Mathieu
Author-Name-Last: Grobéty
Author-Person: pgr495
Title: Government Debt and Growth: The Role of Liquidity
Abstract: How does government debt affect long-run economic growth? A prominent strand of theoretical literature suggests that government debt has a negative effect on growth. Another strand argues that government debt can foster growth by enhancing the supply of liquid assets or collateral. We empirically investigate the liquidity channel of government debt and apply the difference-in-differences methodology of Rajan and Zingales (1998) on a sample of 28 manufacturing industries across 39 developing and developed countries. We provide evidence that industries with greater liquidity needs tend to grow disproportionately faster in countries with higher levels of government debt. The positive liquidity effect of government debt on industry growth stems from domestic debt, not external debt. We perform a battery of robustness checks and show that our results are robust to using instrumental variables and controlling for many competing channels.
Length: 43 pages
Creation-Date: 2017
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2017/working_paper_2017_13
File-Format: text/html
Number: 2017-13
Classification-JEL: H63, D92, O16, G21
Keywords: Government Debt, Growth, Liquidity, Non-linearity
Handle: RePEc:snb:snbwpa:2017-13