Public debt, current account, and economic growth in Germany: Evidence from a nonlinear ARDL model

Abstract

This paper investigated the public debt-growth nexus in Germany using a Nonlinear Autoregressive Distributed Lag (NARDL) model. We first review a history of the public debt problem in Germany from colonial times to the present. Since Germany had trading relationship with the rest of the world, the impact of such a relationship on economic growth is examined by including the current account (CA) as another explanatory variable in addition to public debt. We find that public debt and CA both have asymmetric impacts on the economic growth of Germany. Specifically, an increase in the level of public debt reduces economic growth while a decrease in public debt has no impact. In contrast, an increase in CA raises GDP by more than the increase in public debt-to-GDP ratio reduces GDP growth.