Re-Analysis of the EU Public Debt Crises with NARX

Year 2023, Volume: 21 Issue: 3, 73 - 94, 14.10.2023

Tayfun Tuncay Tosun

https://doi.org/10.11611/yead.1213378

Abstract

This paper estimates the public debt of Southern EU countries by adapting the public debt law of motion equation, which includes the variables that represent the competitiveness of a country such as past public debt, GDP, primary balance, real exchange rate, real interest, and inflation, to Southern EU countries. The analysis is performed with the Non-linear Autoregressive Exogenous Artificial Neural Network, which is a dynamic and robust statistical method for the post-monetary union period consisting of quarterly data between 2005Q1 and 2021Q4. The results of the analysis reveal that the public debt in the Southern EU countries is robustly explained by the public debt law of motion equation with a confidence ratio of over 95%. This result implies that the public debt problem in Southern EU countries is associated with the competitiveness of these countries. In addition, the analysis goes beyond parametric analyzes that relate it to economic growth or a few variables in the estimation of public debt and uncovers the significance of inclusive variables and non-parametric analyzes included in the public debt law of motion equation in solving the problem.

Keywords

EU Public Debt Crises, Southern EU Countries, NARX, Competitiveness Problems

References

• Afonso, A. and Alves, J. (2014) “The Role of Government Debt in Economic Growth”, LISBOA Working Paper, No.16.
• Aghion, P. and Kharroubi, E. (2007) “Cyclical Macro Policy and Industry Growth: The Effect of Countercyclical Fiscal Policy”, IMF Seminars 2008.
• Baldacci, E. and Kumar, M.S. (2010) “Fiscal Deficits, Public Debt and Sovereign Bond Yields”, IMF Working Paper, No.WP/10/184.
• Belguith, S.O. and Omrane, H. (2017) “Macroeconomic Determinants of Public Debt Growth: A Case Study for Tunisia”, Theoretical and Applied Economics, 24(4): 161-168.
• Blyth, M. (2013) “Austerity: The History of A Dangerous Idea”, Oxford University Press, New York.
• Boltho, A. and Carlin, W. (2013) “EMU’s Problems: Asymmetric Shocks or Asymmetric Behavior?”, Comparative Economic Studies, 55(3): 378-403.
• Burriel, P. Westphal, C.C. Pascal, J. Matthias, and S. Nikolai, S. (2020) “Economic Consequences of High Public Debt: Evidence From Three Large Scale DSGE Models”, European Central Bank Working Paper Series, No.2450.
• Burnside, C. Eichenbaum, Martin S. and Rebelo, S. (2001) “Prospective Deficits and the Asian Currency Crisis”, Journal of Political Economy, 10(6): 1155-1197.
• Bosworth, B.P. and Collins, S.M. (2003) “The Empirics of Growth: An Update”, Brookings Papers on Economic Activity, 2: 113-206.
• Calderon, C. and Fuentes, R.J. (2013) “Government Debt and Economic Growth”, IDB Working Paper Series, No.IDB-WP-424.
• Caminal, O.R. (2011) “The EU Architecture to Avert A Sovereign Debt Crisis”, OECD Journal: Financial Market Trends, Volume 2011, No.2.
• Chaudhuri, T.D. and Ghosh, I. (2016) “Artificial Neural Network and Time Series Modeling Based Approach to Forecasting the Exchange Rate in A Multivariate Framework”, Journal of Insurance and Financial Management, 1(5): 92-123.
• Chinn, M.D. and Frieden, J.A. (2012) “The Eurozone in Crisis: Origins and Prospects”, La Follette Policy Report, 21(2): 1-5.
• Chirwa, T.G. and Odhiambo, N.M. (2016) “What Drives Long-Run Economic Growth? Empirical Evidence from South Africa”, Economia Internazionale/International Economics, 69(4): 425-452.
• Chirwa, T.G. and Odhiambo, N.M. (2017) “Sources of Economic Growth in Zambia: An Empirical Investigation”, Global Business Review, 18(2): 275-290.