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The real effects of debt

  • Stephen Cecchetti
  • Madhusudan Mohanty
  • Fabrizio Zampolli

At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 352.

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Length: 39 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:bis:biswps:352
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