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Public debt is always toxic to economic growth

  • Juhana Hukkinen

    ()

    (Bank of Finland)

  • Matti Viren

    ()

    (Bank of Finland and Department of Economics, University of Turku)

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    This paper deals with the debt-growth relationship using several time-series tools. The idea is to find out whether the inverse relationship between these variable can be detected without imposing any functional forms for the estimating relationship and whether the relationship does indeed reflect some nonlinear features. Thus recursive correlations with different orderings of the time-series are computed using the Reinhart and Rogoff panel data. After that, recursive correlations are re-estimated with data that are cyclically adjusted to reflect the structural features of these two variables. The nature of the relationship is also scrutinized by using various variable-parameter estimation techniques (Kalman Filter, Logistic functional form and recursive estimation). Finally, some analyses of causality are carried out using these (filtered) data. The analysis clearly shows that the inverse relationship is very robust indeed and it rather supports the ``toxic debt'' hypothesis than the cyclical debt accumulation hypothesis.

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    File URL: http://ace-economics.fi/kuvat/dp88.pdf
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    Paper provided by Aboa Centre for Economics in its series Discussion Papers with number 88.

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    Length: 17
    Date of creation: Dec 2013
    Date of revision:
    Handle: RePEc:tkk:dpaper:dp88
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    1. Simone Salotti & Carmine Trecroci, 2012. "Even Worse than You thought: The Impact of Public Debt on Aggregate Investment and Productivity," DEGIT Conference Papers c017_020, DEGIT, Dynamics, Economic Growth, and International Trade.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
    3. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
    4. 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.
    5. André Sapir & Marco Buti, 1998. "Economic policy in EMU," ULB Institutional Repository 2013/8078, ULB -- Universite Libre de Bruxelles.
    6. James Tobin, 1965. "The Burden Of The Public Debt: A Review Article," Journal of Finance, American Finance Association, vol. 20(4), pages 679-682, December.
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