The Impact of Government Expenditure on the Greek Government Debt: An Econometric Analysis

Abstract

Sovereign debt crisis in advanced economies keep increasing and its government are implementing fiscal policies to reduce it. Greece is an example of a country whose government debt is a matter of grave concern since it has received the second bailout but still threatens to default. The main aim of this study is determine the impact of government expenditures and government incomes on government debt. This paper estimates the effect of government expenditure on debt in Greece via the vector error correction model framework and granger causality model with annual data from 1976 to 2011 which was collected from the World Development Indicators, European Commission data base and the International Monetary Fund. Vector Error correction Model framework is used to estimate our model and Vector Autoregression Granger causality to determine the direction of causation.The results show a significant negative relationship between gross government debt and gross national income as well as gross government debt and net foreign direct investment. A significant positive relationship is found between gross government debt and gross national expenditure and gross government debt and inflation. The past values of gross national expenditure and gross national income have a predictive ability in determining the present value of gross government debt and not vice versa. Knowing this effects will help policy makers of these countries and the world at larger to revisit its fiscal policy in order to reduce its debt and sustain it.

DOI: 10.5901/mjss.2013.v4n3p323