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

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  • Balázs Égert

    (OECD)

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.

Suggested Citation

  • Balázs Égert, 2012. "Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality?," OECD Economics Department Working Papers 993, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:993-en
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    File URL: http://dx.doi.org/10.1787/5k918xk8d4zn-en
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    References listed on IDEAS

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    More about this item

    Keywords

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

    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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