This paper examines the role of financial frictions in the public debt–growth nexus,
documenting that a public debt shock has different macro-financial implications dependent on the
state of financial markets in South Africa. A non-linear vector autoregression model is estimated
which allows the transmission mechanism to be characterized by two distinct financial regimes:
stressful versus normal. The empirical results suggest that a public debt shock has a broadly
insignificant impact on economic growth over the full sample, reflecting the ineffectiveness of
government borrowing in stimulating the economy, and could suggest that the high and growing
debt service costs faced by the government reduces funds available for investment purposes. Debt
shocks are found to be deflationary in both regimes, lending support to the precautionary savings
effect and the existence of a well-developed financial market, while interest rates decline with the
immediate impact being moderately larger in the stress regime, providing evidence of the
accommodative stance between fiscal policy and monetary policy. In response to a public debt
shock, financial conditions show an immediate and transitory improvement in the high-stress
regime; however, in the low-stress regime there is an immediate yet negligible improvement in
financial conditions. Lastly, the responses evolve over time, with fiscal policy being less effective
in stimulating the economy in the post-crisis period, but it has been effective in reducing financial
stress in the high-stress regime.
Topic:
Economics, Finance, Economic Growth, and Public Debt
Thomas Gautier, Daniela Horta-Saenz, and Gianluca Russo
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
How do states rebuild nations after a major conflict? Truth and Reconciliation
Commissions (TRCs) have emerged as one of the most common interventions to achieve this
objective. Despite their popularity, little is known about their efficacy to foster reconciliation and
nation building. We fill this gap by studying the seminal TRC established in South Africa after the
end of the Apartheid. To measure exposure to TRC across South African municipalities, we
leverage quasi-random variation in media coverage of the TRC message. South African
municipalities with higher historical exposure to TRC on media have lower levels of violence today.
This effect is driven by improved nation building and higher trust towards post-Apartheid
institutions. Exploiting daily variation in TRC hearings and mediatic exposure in the short run, we
bolster our interpretation that our long-run results are forged in the years of TRC activity. The
same evidence suggests that our results are driven by the coverage of TRC on media as opposed
to generic media exposure.
Topic:
Reconciliation, Post-Conflict, Trust, Nation Building, and Truth and Reconciliation