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Debt and Private Investment: Does the EU Suffer from a Debt Overhang?

This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by ap...

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Autores principales: Vanlaer, Willem, Picarelli, Mattia, Marneffe, Wim
Formato: Online Artículo Texto
Lenguaje:English
Publicado: Springer US 2021
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8116168/
http://dx.doi.org/10.1007/s11079-021-09621-x
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author Vanlaer, Willem
Picarelli, Mattia
Marneffe, Wim
author_facet Vanlaer, Willem
Picarelli, Mattia
Marneffe, Wim
author_sort Vanlaer, Willem
collection PubMed
description This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by applying an instrumental variable approach (GMM). Our results support the debt overhang hypothesis and indicate that this relationship only works through the public debt channel. In our baseline regression, a 10 percentage point increase in public debt reduced private investment by €18.32 billion, given the levels of private investment prevalent in 2016. By contrast, private debt does not appear to be a significant determinant of private investment. These results hold after controlling for a number of factors that might have caused public debt to increase and private investment to decrease. While our analysis focuses on the financial sector channel, we find no evidence that public debt tightens the credit constraints for private firms or worsens the public debt overhang. We also show that government bailouts of the financial sector, which could alleviate financial distress and boost credit provision, do not appear to be effective in mitigating the public debt overhang effect. Finally, we find evidence that the financial openness of a country does alleviate the negative impact of public debt on private investment. This might suggest that attracting foreign capital compensates for a contraction in the domestic pool of financial resources due to higher public debt levels.
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spelling pubmed-81161682021-05-13 Debt and Private Investment: Does the EU Suffer from a Debt Overhang? Vanlaer, Willem Picarelli, Mattia Marneffe, Wim Open Econ Rev Research Article This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by applying an instrumental variable approach (GMM). Our results support the debt overhang hypothesis and indicate that this relationship only works through the public debt channel. In our baseline regression, a 10 percentage point increase in public debt reduced private investment by €18.32 billion, given the levels of private investment prevalent in 2016. By contrast, private debt does not appear to be a significant determinant of private investment. These results hold after controlling for a number of factors that might have caused public debt to increase and private investment to decrease. While our analysis focuses on the financial sector channel, we find no evidence that public debt tightens the credit constraints for private firms or worsens the public debt overhang. We also show that government bailouts of the financial sector, which could alleviate financial distress and boost credit provision, do not appear to be effective in mitigating the public debt overhang effect. Finally, we find evidence that the financial openness of a country does alleviate the negative impact of public debt on private investment. This might suggest that attracting foreign capital compensates for a contraction in the domestic pool of financial resources due to higher public debt levels. Springer US 2021-05-13 2021 /pmc/articles/PMC8116168/ http://dx.doi.org/10.1007/s11079-021-09621-x Text en © The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021, corrected publication 2021 This article is made available via the PMC Open Access Subset for unrestricted research re-use and secondary analysis in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the World Health Organization (WHO) declaration of COVID-19 as a global pandemic.
spellingShingle Research Article
Vanlaer, Willem
Picarelli, Mattia
Marneffe, Wim
Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title_full Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title_fullStr Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title_full_unstemmed Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title_short Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
title_sort debt and private investment: does the eu suffer from a debt overhang?
topic Research Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8116168/
http://dx.doi.org/10.1007/s11079-021-09621-x
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