Spillover effects of debt and growth in the euro area: Evidence from a GVAR model

- We analyze spillover effects of public debt and economic growth in the euro area.
- A global vector autoregression model is applied to different regions of the euro zone.
- Growth shocks foster growth in other regions and transitorily lower debt levels.
- Debt shocks do not impact growth dynamics but raise debt levels across the euro area.

This paper employs a global vector autoregression model to analyze two-way spillover effects of public debt and growth between Germany as the largest economy of the euro zone and its core and periphery groups of countries. Using quarterly data over the period 1991Q1-2014Q4, we find that positive growth shocks originating in any of the three entities spill over into higher growth rates in the other regions of the euro area, and also reduce debt levels at least transitorily in all regions. In contrast, debt shocks exert no significant impact on the growth dynamics across the euro zone, but spill over to the debt levels of the other regions through increases in real interest rates, particularly for shocks emanating from the euro area core and periphery.