public debt and economic growth is there a causal effect pdf

Public debt and economic growth is there a causal effect pdf

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Public debt and economic growth: Is there a causal effect?

Debt and Growth: A Decade of Studies

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Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Presbitero Published Economics Journal of Macroeconomics. This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries.

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After having tested whether public debt GDP ratio and real GDP per capita are cointegrated by means of the bounds testing procedure, the possible nonlinearity in the relationship between public debt GDP ratio and economic growth is examined for 17 OECD countries taken separately over the period. The corresponding debt-value threshold is endogenously estimated following Hansen , 's methodology, while simultaneously controlling for additional growth determinants. The findings reveal that the impact of the public debt ratio on economic growth, cointegration and nonlinearity between these two variables, as well as the debt-value thresholds are all country-specific. Thus, analyzing the link between public debt ratio and economic growth for one country individually is revealed to be essential for governments to shape appropriate fiscal policy guidelines. Afonso, A. Barro, R. Bastianin, A.

Public debt and economic growth: Is there a causal effect?

Follow everything happening at the Mercatus Center from week to week by subscribing to This Week at Mercatus. In the decade following the financial crisis of — and the subsequent European sovereign debt crisis beginning in late , academics and economists have been exploring the relationship between government debt and economic growth. In addition, we assess the claim that there is a nonlinear threshold, around 90 percent of GDP, above which debt has a significant deleterious impact on growth rates. A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and percent of GDP. More importantly, every study except two finds a negative relationship between high levels of government debt and economic growth.

The rising government debt levels in the aftermath of global financial crisis and the ongoing euro zone debt crisis have necessitated the revival of the academic and policy debate on the impact of growing debt levels on growth. This study provides a data—rich analysis of the dynamics of government debt and economic growth for a longer period — It spans across different debt regimes and involves a worldwide sample of countries that is more representative than that of studies confined to advanced countries. This study observes a negative relationship between government debt and growth. The point estimates of the range of econometric specifications suggest a percentage point increase in the debt-to-GDP ratio is associated with 23 basis point reduction in average growth. Our results establish the nonlinear relationship between debt and growth. Further, by employing panel vector auto regressions PVAR approach, this study decomposes the cause and effect relationship between debt and growth and offers an answer to the question — Does high debt lead to low growth or low growth leads to high debt?

Whitney K. West, Carmen M. Rogoff, Reinhart, Carmen, Roberto Perotti,


Our finding that there is no evidence that public debt has a causal effect on economic growth is important in the light of the fact that the negative correlation between debt and growth is sometimes used to justify policies that assume that debt has a negative causal effect on economic growth.


Debt and Growth: A Decade of Studies

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