Public debt and economic growth: Is there a causal effect?
TL;DR: This article used an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries and found that there is no evidence that public debt is associated with economic growth.
About: This article is published in Journal of Macroeconomics.The article was published on 2014-09-01 and is currently open access. It has received 451 citations till now. The article focuses on the topics: Internal debt & Debt-to-GDP ratio.
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TL;DR: In this article, the authors identify 26 episodes of public debt overhang, 20 of which lasted more than a decade, and the long duration of these episodes implies that the cumulative shortfall in output from such overhang is potentially massive, and these growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest.
Abstract: exceeds 90 percent of nominal GDP on a sustained basis. Such public debt overhang episodes are associated with lower growth than during other periods. Even more episodes are associated with lower growth than during other periods. Even more striking, among the 26 episodes we identify, 20 lasted more than a decade. The long striking, among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest high public debt are apparently not transmitted exclusively through high real interest rates, in that in eleven of the episodes, interest rates are not materially higher. rates, in that in eleven of the episodes, interest rates are not materially higher.
469 citations
Cites background or result from "Public debt and economic growth: Is..."
...was above the 90 percent debt/GDP threshold, real interest rates were either lower, or about the same, as during the lower debt/GDP years. This result is, for instance, consistent with the classic friction identifi ed in Barro (1979) who, using a model where the government always pays in full, showed how ultimate debt stabilization requires raising distorting taxes or (in principle) adjusting expenditures, both of which potentially affect output....
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...We bring evidence to bear on the issue by identifying the major public debt overhang episodes in advanced economies since the early 1800s. Following Reinhart and Rogoff (2010), we select stretches where gross public debt exceeds 90 percent of nominal GDP on a sustained basis....
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TL;DR: The authors used a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays "fiscal fatigue" whereby its ability to increase primary balances cannot keep pace with rising debt.
Abstract: How high can public debt rise without compromising fiscal solvency? We answer this question using a stochastic model of sovereign default in which risk-neutral investors lend to a government that displays ‘fiscal fatigue’, whereby its ability to increase primary balances cannot keep pace with rising debt. As a result, the government faces an endogenous debt limit beyond which debt cannot be rolled over. Using data for 23 advanced economies over the period 1970–2007, we find evidence of a fiscal reaction function with these features, and use it to compute ‘fiscal space’, defined as the difference between current debt ratios and the estimated debt limits.
399 citations
TL;DR: In this article, the authors investigate the long-run relationship between public debt and growth in a large panel of countries, and find some support for a negative relationship and no evidence for a similar, let alone common, debt threshold within countries.
394 citations
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TL;DR: The authors surveys the recent literature on the links between public debt and economic growth in advanced economies and finds that theoretical models yield ambiguous results, and that there is no paper that can make a strong case for a causal relationship going from debt to economic growth.
Abstract: This paper surveys the recent literature on the links between public debt and economic growth in advanced economies. We find that theoretical models yield ambiguous results. Whether high levels of public debt have a negative effect on long-run growth is thus an empirical question. While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that there is no paper that can make a strong case for a causal relationship going from debt to economic growth. We also find that the presence of thresholds and, more in general, of a non-monotone relationship between debt and growth is not robust to small changes in data coverage and empirical techniques. We conclude with a discussion of the challenges involved in measuring and defining public debt and some suggestions for future research which, in our view, should emphasize cross-country heterogeneity.
246 citations
TL;DR: In this article, the authors put the Reinhart-Rogoff dataset to a formal econometric testing to see whether public debt has a negative nonlinear effect on growth if public debt exceeds 90% of GDP.
Abstract: This paper puts the Reinhart-Rogoff dataset to a formal econometric testing to see whether public debt has a negative nonlinear effect on growth if public debt exceeds 90% of GDP. Using nonlinear threshold models, we show that the negative nonlinear relationship between debt and growth is very sensitive to modelling choices. We also show that when nonlinearity is detected, the negative nonlinear effect kicks in at much lower levels of public debt (between 20% and 60% of GDP). These results, based on bivariate regressions on secular time series, are confirmed on a shorter dataset (1960-2010) using a multivariate growth framework.
187 citations
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5,822 citations