Please use this identifier to cite or link to this item: http://hdl.handle.net/1942/34333
Title: Debt and Private Investment: Does the EU Suffer from a Debt Overhang?
Authors: VANLAER, Willem 
Picarelli, M
MARNEFFE, Wim 
Issue Date: 2021
Publisher: SPRINGER
Source: OPEN ECONOMIES REVIEW, 32 (4) , p. 789-820
Abstract: 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 euro18.32 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.
Keywords: Debt overhang;Private investment;Dynamic panel data
Document URI: http://hdl.handle.net/1942/34333
ISSN: 0923-7992
e-ISSN: 1573-708X
DOI: 10.1007/s11079-021-09621-x
ISI #: 000650068600001
Rights: The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021, corrected publication 2021
Category: A1
Type: Journal Contribution
Validations: ecoom 2022
Appears in Collections:Research publications

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