ABSTRACT
The recent euro area financial crisis has revived the debates on the macroeconomic impact of sovereign debts. After the 2009 Greek announcement of untenable budget deficits, interest rates on sovereign debt increased in a number of EU member states requiring constant interventions and bailouts by international monetary institutions (IMF, ECB and European Commission). Although the conventional wisdom tells us that debt crisis produces harmful effects on economic growth, and that huge increases in public debt have frequently led to sovereign defaults, there is still no consensus regarding the magnitude of the output losses and the timing of the recovery after debt episodes. The current paper investigates - from an empirical perspective – the short and the long-run impact of debt crisis on GDP in the case of 18 euro area (EA) countries over the period 1995-2014. Recent dynamic panel heterogeneity models introduced by Pesaran, Shin and Smith (1999) are employed to disentangle both the long and short-term effects of debt crisis on economic growth. The results suggest that sovereign debt crisis produces significant long-lasting output losses particularly in the case of EA countries that received financial help from international monetary institutions.
