The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area
By Cristina D. Checherita-Westphal, P. Rother. Social Science Research Network, 2010
472 citations recorded by the source corpus.
This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point — beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth — at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies. At the same time, there is evidence that the annual change of the public debt ratio and the budget deficit-to-GDP ratio are negatively and linearly associated with per-capita GDP growth. The channels through which government debt (level or change) is found to have an impact on the economic growth rate are: (i) private saving; (ii) public investment; (iii) total factor productivity (TFP) and (iv) sovereign long-term nominal and real interest rates. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/ab53fb9e0f07c9c5da79863f9596da16da6439df
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Citations in the corpus
- Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China (2016, unknown): “…public equities; adverse growth outcomes; rising unemployment from deleveraging; and lack of capital to finance productive investments (Meade, 1958; Checherita and Rother, 2010; Rogoff and Reinhart, 2010; Reinhart et al. , 2012; Bowdler and Esteves, 2013): several of these negative consequences…”
- Cecchetti , Mohanty and Zampolli The real effects of debt The real effects of debt (2011, unknown): “2 Recent empirical studies of the effect of public debt on growth using panel data include Checherita and Rother (2010) and Kumar and Woo (2010). Unlike these studies, ours investigates the impact on growth of household and non-financial corporate debt too.”
- Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality? (2015, background): “Third, public authorities, especially in countries with weak institutions, may decide to inflate away debt, and high inflation has a notoriously detrimental effect on growth (Kumar and Woo, 2010). Many recent empirical papers sought to pin down and explain the possibly nonlinear negative relationshi”