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

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  • Balázs Égert

Abstract

The 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. We show that when non-linearity 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 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. Dette publique, croissance économique et effets non-linéaires : mythe ou réalité ? Les économistes semblent de plus en plus approuver l'existence d'un effet fortement négatif non linéaire de la dette publique sur la croissance économique. Reinhart et Rogoff (2010) furent les premiers à souligner que la dette publique par rapport au PIB supérieur à 90% du PIB est associée à une performance économique nettement plus faible dans les économies avancées et émergentes. Une série de récentes études empiriques confirme largement cette valeur seuil. Ce papier vise à contribuer à cette littérature en mettant une variante du jeu de données de Reinhart et Rogoff à un test économétrique formelle. En utilisant des modèles non linéaires à seuils, nous confirmons l’existence d'une relation non linéaire négative entre la dette et la croissance. Mais ces résultats sont très sensibles à la dimension temporelle et la couverture des pays considérés, la fréquence des données (données annuelles par rapport aux données pluriannuels) et des hypothèses sur le nombre minimum d'observations requises dans chaque régime non linéaire. Nous montrons que lorsque la non-linéarité est détectée, les effets négatifs non linéaires entrent en action à des niveaux beaucoup plus faibles de la dette publique (entre 20% et 60% du PIB). Ces résultats, basés sur des régressions bivariées sur des séries très longues sont largement confirmés sur une période plus courte (1960 2010) lors de l'utilisation d'un cadre de croissance multivarié qui considère des facteurs traditionnels de la croissance économique à long terme et l'incertitude du modèle. Les effets non linéaires peuvent être plus complexes et plus difficiles à modéliser qu'on ne le pensait. L'instabilité peut être le résultat de l'évolution des effets non linéaires dans le temps, entre les pays et les conditions économiques. Des recherches complémentaires sont certainement nécessaires pour mieux comprendre le lien entre la dette publique et de la croissance.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 993.

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Date of creation: 17 Oct 2012
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Handle: RePEc:oec:ecoaaa:993-en

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

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  1. 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.
  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. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  4. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013. "Debt and growth: New evidence for the euro area," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 809-821.
  5. Ugo Panizza & Andrea Filippo Presbitero, 2012. "Public Debt and Economic Growth: Is There a Causal Effect?," Mo.Fi.R. Working Papers 65, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Crespo Cuaresma, Jesus & Doppelhofer, Gernot, 2007. "Nonlinearities in cross-country growth regressions: A Bayesian Averaging of Thresholds (BAT) approach," Journal of Macroeconomics, Elsevier, vol. 29(3), pages 541-554, September.
  7. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  8. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  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, vol. 26(3), pages 69-86, Summer.
  10. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  11. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
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Cited by:
  1. Ugo Panizza & Andrea F. Presbitero, 2013. "Public Debt and Economic Growth in Advanced Economies: A Survey," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 175-204, June.
  2. Ruthira Naraidoo & Leroi Raputsoane, 2013. "Debt sustainability and financial crises in South Africa," Working Papers 201352, University of Pretoria, Department of Economics.
  3. Douglas Sutherland & Peter Hoeller & Rossana Merola & Volker Ziemann, 2012. "Debt and Macroeconomic Stability," OECD Economics Department Working Papers 1003, OECD Publishing.
  4. Randall S. Jones & Satoshi Urasawa, 2013. "Restoring Japan's Fiscal Sustainability," OECD Economics Department Working Papers 1050, OECD Publishing.
  5. 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.
  6. 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, vol. 204(1), pages 113-139, March.
  7. 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.
  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.

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