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Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality

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  • Balazs Egert

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4157.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4157

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Keywords: public debt; economic growth; nonlinearity; threshold effects;

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References

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  1. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  2. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, Elsevier, vol. 93(2), pages 345-368, December.
  3. Ugo Panizza & Andrea Filippo Presbitero, 2012. "Public Debt and Economic Growth: Is There a Causal Effect?," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 65, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Doppelhofer, G. & Cuaresma, J.C., 2007. "Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0706, Faculty of Economics, University of Cambridge.
  5. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
  6. Checherita-Westphal, Cristina & Rother, Philipp, 2010. "The impact of high and growing government debt on economic growth: an empirical investigation for the euro area," Working Paper Series, European Central Bank 1237, European Central Bank.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, American Economic Association, vol. 101(5), pages 1676-1706, August.
  8. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7661, C.E.P.R. Discussion Papers.
  9. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 26(3), pages 69-86, Summer.
  10. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013. "Debt and growth: New evidence for the euro area," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 809-821.
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Cited by:
  1. Hansjörg Blöchliger, 2013. "Fiscal Consolidation Across Government Levels - Part 1. How Much, What Policies?," OECD Economics Department Working Papers 1070, OECD Publishing.
  2. Luiz de Mello, 2013. "What Can Fiscal Policy Do in the Current Recession? A Review of Recent Literature and Policy Options," Hacienda Pública Española, IEF, IEF, vol. 204(1), pages 113-139, March.
  3. 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.
  4. Ruthira Naraidoo & Leroi Raputsoane, 2013. "Debt sustainability and financial crises in South Africa," Working Papers 201352, University of Pretoria, Department of Economics.
  5. Mthuli Ncube & Zuzana Brixiová, 2013. "Public Debt Sustainability in Africa: Building Resilience and Challenges Ahead," William Davidson Institute Working Papers Series wp1053, William Davidson Institute at the University of Michigan.
  6. David Turner & Francesca Spinelli, 2013. "The Effect of Government Debt, External Debt and their Interaction on OECD Interest Rates," OECD Economics Department Working Papers 1103, OECD Publishing.
  7. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
  8. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
  9. Randall S. Jones & Satoshi Urasawa, 2013. "Restoring Japan's Fiscal Sustainability," OECD Economics Department Working Papers 1050, OECD Publishing.

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