Public debt, economic growth and nonlinear effects : myth or reality? / Balázs Égert

Englisch

Paris : OECD, 2012

Online-Ressource : graph. Darst.

ECO/WKP(2012)70

Zsfassung in franz. Sprache

Systemvoraussetzungen: Acrobat Reader

DOI: 10.1787/5k918xk8d4zn-en

*Economics

Öffentliche Schulden / Wirtschaftswachstum / Welt / 1790-2009

Amtsdruckschrift / Government document / Arbeitspapier / Working paper / Online-Publikation / Online-publication

Journal of Economic Literature: E6

Journal of Economic Literature: F3

Journal of Economic Literature: F4

Journal of Economic Literature: N4

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.

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