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The Dynamics of Government Debt and Economic Growth

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  • Vighneswara Swamy

    (Institute of Economic Growth, Delhi)

Abstract

The dynamics of government debt and economic growth, once a subject of interest to very few macroeconomists, is suddenly of immense attention for many researchers in the backdrop of the Eurozone sovereign debt crisis and of related research by Reinhart and Rogoff. This study investigates the government debt-growth relationship and contributes to the literature in the following ways. First, we extend the horizon of analysis to several country groupings and make the study inclusive of economic, political, and regional diversities—based on a sizeable dataset. Second, we provide evidence for the presence of a causal link going from debt to growth with the use of ‘instrumental variables approach', unlike Reinhart and Rogoff's approach. Third, we overcome the issues related to data adequacy, coverage of countries, heterogeneity, endogeneity, and non-linearities by conducting a battery of robustness tests. We find that a 10-percentage-point increase in the debt-to-GDP ratio is associated with 2—23 basis point reduction in average growth. Our results establish the non-linear relationship between debt and growth.

Suggested Citation

  • Vighneswara Swamy, 2015. "The Dynamics of Government Debt and Economic Growth," IEG Working Papers 359, Institute of Economic Growth.
    • Handle: RePEc:awe:wpaper:359
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    References listed on IDEAS

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    More about this item

    Keywords

    Government debt; economic growth; debt thresholds; panel data; non-linearity; country groupings;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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