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Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities

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  • Alexandru MINEA

    (Centre d'Etudes et de Recherches sur le Développement International)

  • Antoine PARENT

Abstract

In their already-famous 2010 article “Growth-in-a-Time-of-Debt” (AER-100(2)-pp.-573-78), Carmen Reinhart and Kenneth Rogoff show that average post-WW2 economic growth is dramatically declining in advanced economies, once the debt-to-GDP ratio is above a 90% threshold. We explore the relevance of this exogenous threshold using up-to-date econometric techniques, and reveal an endogenously-estimated threshold around a debt-to-GDP ratio of 115%, above which the negative debt-growth link changes sign. Consequently, additional evidence is needed before suggesting policy recommendations regarding growth effects of fiscal policy in such high debt regimes, which may be subject to complex nonlinearities.

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Bibliographic Info

Paper provided by CERDI in its series Working Papers with number 201218.

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Length: 23
Date of creation: 2012
Date of revision:
Handle: RePEc:cdi:wpaper:1355

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Keywords: public debt; economic growth; nonlinear effects; cliometrics;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 573-78, May.
  2. International Monetary Fund, 2010. "A Historical Public Debt Database," IMF Working Papers, International Monetary Fund 10/245, International Monetary Fund.
  3. Andres Gonzalez & Timo Terasvirta & Dick van Dijk, 2005. "Panel Smooth Transition Regression Models," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 165, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  5. Antoine Parent, 2012. "A critical note on "This time is different"," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), Association Française de Cliométrie (AFC), vol. 6(2), pages 211-219, May.
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Cited by:
  1. Balazs Egert, 2013. "The 90% Public Debt Threshold: The Rise and Fall of a Stylised Fact," CESifo Working Paper Series, CESifo Group Munich 4242, CESifo Group Munich.
  2. Jorda, Oscar & Schularick, Moritz & Taylor, Alan M., 2013. "Sovereigns versus banks: credit, crises, and consequences," Working Paper Series, Federal Reserve Bank of San Francisco 2013-37, Federal Reserve Bank of San Francisco.
  3. Andros Kourtellos & Thanasis Stengos & Chih Ming Tan, 2012. "The Effect of Public Debt on Growth in Multiple Regimes," Working Papers, University of Guelph, Department of Economics and Finance 1210, University of Guelph, Department of Economics and Finance.
  4. Lof, Matthijs & Malinen, Tuomas, 2013. "Does sovereign debt weaken economic growth? A Panel VAR analysis," MPRA Paper 52039, University Library of Munich, Germany.
  5. Ugo Panizza & Andrea Filippo Presbitero, 2013. "Public Debt and Economic Growth in Advanced Economies: A Survey," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 78, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Markus Eberhardt & Andrea Presbitero, 2013. "This Time They Are Different: Heterogeneity and Nonlinearity in the Relationship Between Debt and Growth," IMF Working Papers, International Monetary Fund 13/248, International Monetary Fund.
  7. Michele Fratianni & Francesco Marchionne, 2014. "Bank asset reallocation and sovereign debt," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2014-09, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  8. Balazs Egert, 2013. "The 90% Public Debt Threshold: The Rise & Fall of a Stylised Fact," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp1048, William Davidson Institute at the University of Michigan.

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