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

  • Balazs Egert

This paper puts the original Reinhart-Rogoff dataset, made public by Herndon et al. (2013), to a formal econometric test to pin down debt threshold 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 there may be a tipping point at around 20% of GDP, beyond which central government debt has a negative influence on growth. Further (and greater) thresholds may exist but their magnitude is highly uncertain. For general government debt (1960-2009), the threshold beyond which negative growth effects kick 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 might have a negative effect on economic performance kicking in at already fairly moderate public debt levels. 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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4242.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4242
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  1. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Debt Overhangs: Past and Present," NBER Working Papers 18015, National Bureau of Economic Research, Inc.
  2. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2012. "Debt and growth: new evidence for the euro area," Working Paper Series 1450, European Central Bank.
  3. Jesus Crespo Cuaresma & Gernot Doppelhofer, 2006. "Nonlinearities in Cross-Country Growth Regressions: A Bayesian Averaging of Thresholds (BAT) Approach," Vienna Economics Papers 0608, University of Vienna, Department of Economics.
  4. 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.
  5. 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.
  6. 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.
  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. 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.
  9. Alexandru Minea & Antoine Parent, 2012. "Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities," Working Papers 12-08, Association Française de Cliométrie (AFC).
  10. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  11. 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.
  12. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," NBER Working Papers 15639, National Bureau of Economic Research, Inc.
  13. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
  14. 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.).
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