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The 90% Public Debt Threshold: The Rise and Fall of a Stylised Fact

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  • Balázs Égert

Abstract

This paper puts the original Reinhart-Rogoff dataset, made public by Herndon et al. (2013), to a formal econometric test to pin down debt thresholds endogenously. We show that the nonlinear relation from debt to growth is not very robust. Taken with a pinch of salt, our results suggest, however, that a negative association between debt and growth may set in at debt levels as low as 20% of GDP. Further (and greater) thresholds may exist but their magnitude is highly uncertain. For general government debt (1960-2009), the threshold beyond which this negative relation kicks in is considerably higher at about 50%. Finally, individual country estimates reveal a large amount of cross-country heterogeneity. For some countries including the United States, a nonlinear negative link can be detected at about 30% of GDP. For others, the thresholds are surrounded by a great amount of uncertainty or no nonlinearities can be established. This instability may be a result of threshold effects changing over time within countries and depending on economic conditions, not captured in our estimations. Overall, our results can be seen as a formal econometric confirmation that the 90% public debt threshold is not in the Reinhart-Rogoff data. But our results also seem to suggest that public debt be associated with poor economic performance at fairly moderate public debt levels. If high debt results in low growth, an issue of causality that is not systematically examined in this paper, then this suggests rather low debt-GDP ratios would be appropriate. Furthermore, the absence of threshold effects or low estimated thresholds may not preclude the emergence of further threshold effects, especially as public debt levels are rising to unprecedentedly high levels. Le seuil de la dette publique à 90 % : L'ascension et la chute d'un fait stylisé Ce document met la base de données originale de Reinhart et Rogoff, rendu public par Herndon et al. (2013), à un test économétrique formelle afin d’identifier des seuils de la dette de façon endogène. Nous montrons que la relation non linéaire de la dette à la croissance n'est pas très robuste. Pris avec une pincée de sel, nos résultats suggèrent, cependant, qu'une association négative entre la dette et la croissance peut exister à un niveau d'endettement aussi bas que 20% du PIB. D'autres seuils (plus élevés) peuvent exister, mais leur ampleur est hautement incertaine. Pour la dette consolidée des administrations publiques (1960 2009), le seuil au-delà duquel cette relation négative entre en action est considérablement plus élevée à environ 50%. Enfin, les estimations des différents pays révèlent une grande hétérogénéité entre les pays. Pour certains pays, dont les États-Unis, un lien négatif non linéaire peut être détecté à environ 30% du PIB. Pour d'autres, les seuils sont entourés d'une grande incertitude ou aucuns effets non-linéaires ne peuvent être établis. Cette instabilité peut être le résultat d'effets de seuil en évolution au fil du temps au sein des pays et en fonction des conditions économiques, ne figurent pas dans nos estimations. Dans l'ensemble, nos résultats peuvent être considérés comme une confirmation économétrique formelle que le seuil de la dette publique à 90% n'est pas dans les données de Reinhart et Rogoff. Mais nos résultats semblent également indiquer que la dette publique est associée à une mauvaise performance économique à des niveaux d'endettement public relativement modérés. Si une dette publique entraine une faible croissance économique, une question de causalité qui n'est pas systématiquement examinée dans le présent document, alors ceci suggère que de plutôt faibles ratios d'endettement publiques du PIB serait approprié. En outre, l'absence d'effets de seuil ou de faibles seuils estimés ne peut pas empêcher l'émergence de nouveaux effets de seuil, d'autant plus que les niveaux de la dette publique sont en hausse à des niveaux sans précédent.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 1055.

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Date of creation: 06 Jun 2013
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Handle: RePEc:oec:ecoaaa:1055-en

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Keywords: public debt; economic growth; nonlinearity; threshold effects; effet de seuil; dette publique; croissance économique; non-linéarité;

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  1. Panizza, Ugo & Presbitero, Andrea F., 2012. "Public debt and economic growth: Is there a causal effect?," POLIS Working Papers 168, Institute of Public Policy and Public Choice - POLIS.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  3. Alexandru MINEA & Antoine PARENT, 2012. "Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities," Working Papers 201218, CERDI.
  4. 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, vol. 26(3), pages 69-86, Summer.
  5. Pier Carlo Padoan & Urban Sila & Paul van den Noord, 2012. "Avoiding Debt Traps: Financial Backstops and Structural Reforms," OECD Economics Department Working Papers 976, OECD Publishing.
  6. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  7. Thomas Herndon & Michael Ash & Robert Pollin, 2013. "Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo ff," Working Papers wp322, Political Economy Research Institute, University of Massachusetts at Amherst.
  8. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2012. "Debt and growth: new evidence for the euro area," Working Paper Series 1450, European Central Bank.
  9. Deniz Baglan & Emre Yoldas, 2013. "Government debt and macroeconomic activity: a predictive analysis for advanced economies," Finance and Economics Discussion Series 2013-05, Board of Governors of the Federal Reserve System (U.S.).
  10. Doppelhofer, G. & Cuaresma, J.C., 2007. "Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach," Cambridge Working Papers in Economics 0706, Faculty of Economics, University of Cambridge.
  11. Pier Carlo Padoan & Urban Sila & Paul van den Noord, 2012. "Avoiding debt traps: Fiscal consolidation, financial backstops and structural reforms," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 151-177.
  12. 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 1237, European Central Bank.
  13. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
  14. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  15. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
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Cited by:
  1. Markus Eberhardt, 2013. "Nonlinearities in the Relationship between Debt and Growth: Evidence from Co-Summability Testing," Discussion Papers 2013/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Crafts, Nicholas, 2013. "What Does the 1930s’ Experience Tell Us about the Future of the Eurozone?," CAGE Online Working Paper Series 142, Competitive Advantage in the Global Economy (CAGE).
  3. Markus Eberhardt & Andrea F. Presbitero, 2013. "This Time They’re Different: Heterogeneity and Nonlinearity in the Relationship between Debt and Growth," Discussion Papers 2013/10, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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