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

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  • Balazs Egert

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Abstract

This paper analyses the original Reinhart-Rogoff dataset, made public by Herndon et al. (2013), on the basis of descriptive statistics and formal econometric testing. First, based on the public debt thresholds (30%, 60% and 90%) proposed by Reinhart and Rogoff (2010), descriptive statistics reveal that real GDP growth slows considerably as the central government debt-to-GDP ratio goes beyond the 30% threshold and that no further slowdown can be observed in the data as the debt-to-GDP ratio rises above 60% and 90% during the periods 1790-2009 and 1946-2009. For the United States (1946-2009), the negative nonlinear finding completely disappears for any level of public debt, once reverse causality and influential outliers are accounted for. Looking at general (and central) government debt during the more recent period of 1960-2009 suggests that economic slowdown occurs when public debt moves above 60% or 90% of GDP. But it seems more appropriate to determine nonlinearity and the associated debt threshold endogenously. Therefore, in a second stage, we put the Reinhart-Rogoff dataset to a formal econometric test by employing nonlinear threshold models. Overall, our estimation results indicate 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 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.

Suggested Citation

  • Balazs Egert, 2013. "The 90% Public Debt Threshold: The Rise & Fall of a Stylised Fact," William Davidson Institute Working Papers Series wp1048, William Davidson Institute at the University of Michigan.
  • Handle: RePEc:wdi:papers:2013-1048
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    References listed on IDEAS

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    1. Thomas Herndon & Michael Ash & Robert Pollin, 2014. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff," Cambridge Journal of Economics, Oxford University Press, vol. 38(2), pages 257-279.
    2. 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.
    3. Panizza, Ugo & Presbitero, Andrea F., 2014. "Public debt and economic growth: Is there a causal effect?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 21-41.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    5. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    6. Alexandru Minea & Antoine Parent, 2012. "Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and some complex nonlinearities," Working Papers halshs-00700471, HAL.
    7. Crespo Cuaresma, Jesus & Doppelhofer, Gernot, 2007. "Nonlinearities in cross-country growth regressions: A Bayesian Averaging of Thresholds (BAT) approach," Journal of Macroeconomics, Elsevier, vol. 29(3), pages 541-554, September.
    8. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
    9. 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.).
    10. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
    11. Baum, Anja & Checherita-Westphal, Cristina & Rother, Philipp, 2013. "Debt and growth: New evidence for the euro area," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 809-821.
    12. 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.
    13. 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.
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    Cited by:

    1. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2015. "“On the bi-directional causal relationship between public debt and economic growth in EMU countries”," IREA Working Papers 201512, University of Barcelona, Research Institute of Applied Economics, revised May 2015.
    2. Panizza, Ugo & Presbitero, Andrea F., 2014. "Public debt and economic growth: Is there a causal effect?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 21-41.
    3. Ehrhart, Hélène & Minea, Alexandru & Villieu, Patrick, 2014. "Debt, seigniorage, and the Growth Laffer Curve in developing countries," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 199-210.
    4. Oblath, Gábor & Halpern, László, 2014. "A gazdasági stagnálás "színe" és fonákja. Mivel jár együtt az exporttöbblet és az adósságcsökkenés?
      [The bright" and gloomy side of economic stagnation]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 757-800.
    5. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2015. "“Short-run and long-run effects of public debt on economic performance: Evidence from EMU countries”," IREA Working Papers 201522, University of Barcelona, Research Institute of Applied Economics, revised Sep 2015.
    6. Sokbae Lee & Hyunmin Park & Myung Hwan Seo & Youngki Shin, 2014. "A contribution to the Reinhart and Rogoff debate: not 90 percent but maybe 30 percent," CeMMAP working papers CWP39/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    7. Yannis Dafermos, 2015. "The ‘other half’ of the public debt–economic growth relationship: a note on Reinhart and Rogoff," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 12(1), pages 20-28, April.
    8. Gómez-Puig, Marta & Sosvilla-Rivero, Simón, 2015. "The causal relationship between debt and growth in EMU countries," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 974-989.

    More about this item

    Keywords

    public debt; economic growth; nonlinearity; 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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