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Public debt, economic growth and nonlinear effects: Myth or reality?

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  • Balázs Égert

Abstract

This paper puts a variant of 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 finding a negative nonlinear relationship between the public debt-to-GDP ratio and economic growth is extremely difficult and sensitive to modelling choices and data coverage. In the very rare cases when nonlinearity à la Reinhart and Rogoff can be detected, the negative nonlinear correlation kicks in at very low levels of public debt (between 20% and 60% of GDP). These results, based on bivariate regressions for central government debt from 1946 to 2009, are confirmed on a shorter dataset including general government debt (1960–2010) using a multivariate growth framework and Bayesian model averaging.

Suggested Citation

  • Balázs Égert, 2015. "Public debt, economic growth and nonlinear effects: Myth or reality?," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 226-238.
  • Handle: RePEc:eee:jmacro:v:43:y:2015:i:c:p:226-238
    DOI: 10.1016/j.jmacro.2014.11.006
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    More about this item

    Keywords

    Public debt; Economic growth; Nonlinearity; Threshold effects;
    All these keywords.

    JEL classification:

    • 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

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