Public debt, economic growth and nonlinear effects: Myth or reality?
AbstractThe economics profession seems to increasingly endorse the existence of a strongly negative nonlinear effect of public debt on economic growth. Reinhart and Rogoff (2010) were the first to point out that a public debt-to-GDP ratio higher than 90% of GDP is associated with considerably lower economic performance in advanced and emerging economies alike. A string of recent empirical papers broadly validates this threshold value. This paper seeks to contribute to this literature by putting a variant of the Reinhart-Rogoff dataset to a formal econometric testing. Using nonlinear threshold models, there is some evidence in favour of a negative nonlinear relationship between debt and growth. But these results are very sensitive to the time dimension and country coverage considered, data frequency (annual data vs. multi-year averages) and assumptions on the minimum number of observations required in each nonlinear regime. In addition, we also show that nonlinear effects can kick 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 largely confirmed on a shorter dataset (1960-2010) when using a multivariate growth framework that accounts for traditional drivers of long-term economic growth and model uncertainty. Nonlinear effects might be more complex and difficult to model than previously thought. Instability might be a result of nonlinear effects changing over time, across countries and economic conditions. Further research is certainly needed to fully understand the link between public debt and growth.
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Bibliographic InfoPaper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-44.
Length: 29 pages
Date of creation: 2012
Date of revision:
Public debt; economic growth; nonlinearity; threshold effects;
Other versions of this item:
- Balazs Egert, 2013. "Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality," CESifo Working Paper Series 4157, CESifo Group Munich.
- Balázs Égert, 2013. "Public debt, economic growth and nonlinear effects: Myth or reality?," William Davidson Institute Working Papers Series wp1042, William Davidson Institute at the University of Michigan.
- Balázs Égert, 2012. "Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality?," OECD Economics Department Working Papers 993, OECD Publishing.
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- N4 - Economic History - - Government, War, Law, International Relations, and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-10 (All new papers)
- NEP-FDG-2012-12-10 (Financial Development & Growth)
- NEP-MAC-2012-12-10 (Macroeconomics)
- NEP-PBE-2012-12-10 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Mo.Fi.R. Working Papers
65, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
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Mo.Fi.R. Working Papers
78, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
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