- Open Access
Public debt and economic growth in advanced economies: A survey
Swiss Journal of Economics and Statistics volume 149, pages175–204(2013)
This paper surveys the recent literature on the links between public debt and economic growth in advanced economies. We find that theoretical models yield ambiguous results. Whether high levels of public debt have a negative effect on long-run growth is thus an empirical question. While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that there is no paper that can make a strong case for a causal relationship going from debt to economic growth. We also find that the presence of thresholds and, more in general, of a non-monotone relationship between debt and growth is not robust to small changes in data coverage and empirical techniques. We conclude with a discussion of the challenges involved in measuring and defining public debt and some suggestions for future research which, in our view, should emphasize cross-country heterogeneity.
Abbas, S. M. Ali, Nazim Belhocine, Asmaa A. El-Ganainy, and Mark A. Horton (2011), “Historical Patterns and Dynamics of Public Debt – Evidence from a New Database”, IMF Economic Review, 59(4), pp. 717–742.
Afonso, Antonio, and Joao Tovar Jalles (2013), “Growth and Productivity: The Role of Government Debt”, International Review of Economics & Finance, 25, pp. 384–407.
Arellano, Manuel, and Stephen Bond (1991), “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations”, Review of Economic Studies, 58(2), pp. 277–297.
Arslanalp, Serkan, and Takahiro Tsuda (2012), “Tracking Global Demand for Advanced Economy Sovereign Debt”, IMF Working Papers 12/284, International Monetary Fund.
Barro, Robert J. (1974), “Are Government Bonds Net Wealth?”, Journal of Political Economy, 82(6), pp. 1095–1117.
Baum, Anja, Cristina Checherita-Westphal, and Philipp Rother (2012), “Debt and Growth: New Evidence for the Euro Area”, Journal of International Money and Finance, 32, pp. 809–821.
Bazzi, Samuel, and Michael Clemens (2013), “Blunt Instruments: Avoiding Common Pitfalls in Identifying the Causes of Economic Growth”, American Economic Journal: Macroeconomics, 5(2), pp. 152–186.
Blundell, Richard, and Stephen Bond (1998), “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models”, Journal of Econometrics, 87(1), pp. 115–143.
Bond, Stephen Roy (2002), “Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice”, Portuguese Economic Journal, 1, pp. 141–162.
Bordo, Michael D., Christopher M. Meissner, and David Stuckler (2010), “Foreign Currency Debt, Financial Crises and Economic Growth: A Long-Run View”, Journal of International Money and Finance, 29(4), pp. 642–665.
Bun, Maurice J. G., and Frank Windmeijer (2010), “The Weak Instrument Problem of the System GMM Estimator in Dynamic Panel Data Models”, Econometrics Journal, 13(1), pp. 95–126.
Campos, Camila F. S., Dany Jaimovich, and Ugo Panizza (2006), “The Unexplained Part of Public Debt”, Emerging Markets Review, 7(3), pp. 228–243.
Caner, Mehmet, and Bruce E. Hansen (2004), “Instrumental Variable Estimation of a Threshold Model”, Econometric Theory, 20(05), pp. 813–843.
Cecchetti, Stephen, Madhusudan Mohanty, and Fabrizio Zampolli (2012), “Achieving Growth Amid Fiscal Imbalances: The Real Effects of Debt”, in: Achieving Maximum Long-Run Growth – A Symposium Sponsored by The Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City.
Cerra, Valerie, and Sweta Chaman Saxena (2008), “Growth Dynamics: The Myth of Economic Recovery”, American Economic Review, 98(1), pp. 439–457.
Checherita-Westphal, Cristina, and Philipp Rother (2012), “The Impact of High Government Debt on Economic Growth and Its Channels: An Empirical Investigation for the Euro Area”, European Economic Review, 56(7), pp. 1392–1405.
Checherita-Westphal, C., A. Hughes Hallett, and P. Rother (2012), “Fiscal Sustainability using Growth-Maximising Debt Targets”, Working Paper Series 1472, European Central Bank.
Cochrane, John H. (2011a), “Inflation and Debt”, National Affairs, (9), pp. 56–78.
Cochrane, John H. (2011b), “Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic”, European Economic Review, 55(1), pp. 2–30.
Cordella, Tito, Luca Antonio Ricci, and Marta Ruiz-Arranz (2010), “Debt Overhang or Debt Irrelevance?”, IMF Staff Papers, 57(1), pp. 1–24.
Cowan, Kevin, Eduardo Levy Yeyati, Ugo Panizza, and Federico Sturzenegger (2006), “Sovereign Debt in the Americas: New Data and Stylized Facts”, RES Working Papers 4480, Inter-American Development Bank, Research Department.
DeLong, Bradford J., and Lawrence H Summers (2012), “Fiscal Policy in a Depressed Economy”, Brookings Papers on Economic Activity, Spring.
De Grauwe, Paul (2011), “The Governance of a Fragile Eurozone”, Working Document 346, CEPS, May.
De Santis, Roberto A. (2012), “The Euro Area Sovereign Debt Crisis: Safe Haven, Credit Rating Agencies and the Spread of the Fever From Greece, Ireland and Portugal”, Working Paper Series 1419, European Central Bank.
Dippelsman, Robert, Claudia Dziobek, and Carlos A. Gutiérrez Mangas (2012), “What Lies Beneath: The Statistical Definition of Public Sector Debt. An Overview of the Coverage of Public Sector Debt for 61 Countries”, IMF Staff Discussion Note 12/09, International Monetary Fund.
Eberhardt, Markus, and Andrea F. Presbitero (2013), “This Time They’re Different: Heterogeneity and Nonlinearity in the Relationship between Debt and Growth”, mimeo.
Égert, Balázs (2012), “Public Debt, Economic Growth and Nonlinear Effects: Myth or Reality?”, OECD Economics Department Working Papers 993, OECD Publishing, October.
Elmendorf, Douglas W., and Gregory N. Mankiw (1999), “Government Debt”, in J. B. Taylor and M. Woodford (eds), Handbook of Macroeconomics, volume 1 of Handbook of Macroeconomics, pp. 1615–1669. Elsevier.
Ghosh, Atish R., Jun I. Kim, Enrique G. Mendoza, Jonathan D. Ostry, and Mahvash S. Qureshi (2012), “Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies”, Economic Journal, forthcoming.
González, Andrés, Timo Teräsvirta, and Dick van Dijk (2005), “Panel Smooth Transition Regression Models”, Working Paper Series in Economics and Finance 604, Stockholm School of Economics, August.
Greiner, Alfred (2011), “Economic Growth, Public Debt and Welfare: Comparing Three Budgetary Rules”, German Economic Review, 12(2), pp. 205–222.
Greiner, Alfred (2012), “Debt and Growth: Is There a Non-Monotonic Relation?”, Working Papers in Economics and Management 04-2012, Bielefeld University.
Greiner, Alfred (2013), “Sustainable Public Debt and Economic Growth under Wage Rigidity”, Metroeconomica, 64(2), pp. 272–292.
Hagist, Christian, Stefan Moog, Bernd Raffelhüschen, and Johannes Vatter (2009), “Public Debt and Demography – An International Comparison Using Generational Accounting”, CESifo DICE Report, 7(4), pp. 29–36.
Hansen, Bruce E. (1999), “Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference”, Journal of Econometrics, 93(2), pp. 345–368.
Hansen, Bruce E. (2000), “Sample Splitting and Threshold Estimation”, Econometrica, 68(3). pp. 575–604.
Hausmann, Ricardo, and Ugo Panizza (2011), “Redemption or Abstinence? Original Sin, Currency Mismatches and Counter Cyclical Policies in the New Millennium”, Journal of Globalization and Development, 2(1), p. 4.
Herndon, Thomas, Michael Ash, and Robert Pollin (2013), “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff”, PERI working paper no. 322, April.
Inter-American Development Bank (2006), Living with Debt: How to Limit the Risks of Sovereign Finance. Harvard University Press, Cambridge, MA, 2006.
Jaramillo, Laura, and Carlo Cottarelli (2012), “Walking Hand in Hand: Fiscal Policy and Growth in Advanced Economies”, IMF Working Papers 12/137, International Monetary Fund.
Kourtellos, Andros, Thanasis Stengos, and Chih Ming Tan (2012), “Structural Threshold Regression”, University of Cyprus Working Papers in Economics 13-2011, University of Cyprus Department of Economics.
Kourtellos, Andros, Thanasis Stengos, and Chih Ming Tan (2012), “The Effect of Public Debt on Growth in Multiple Regimes”, Social Service Research Network, http://ssrn.com/abstract=2099957 or http://dx.doi.org/10.2139/ssrn.2099957.
Krugman, Paul (1988), “Financing vs. Forgiving a Debt Overhang”, Journal of Development Economics, 29(3). pp. 253–268.
Krugman, Paul (2011), “Self-Defeating Austerity”, New York Times, July 7.
Kumar, Manmohan S., and Jaejoon Woo (2010), “Public Debt and Growth”, IMF Working Papers 10/174, International Monetary Fund, July.
Lind, Jo Thori, and Halvor Mehlum (2010), “With or Without U? The Appropriate Test for a U-Shaped Relationship”, Oxford Bulletin of Economics and Statistics, 72(1), pp. 109–118.
Maddison, Angus (2007), The World Economy Volume 1: A Millennial Perspective Volume 2: Historical Statistics. Academic Foundation.
Mankiw, N. Gregory, David Romer, and David N. Weil (1992), “A Contribution to the Empirics of Economic Growth”, The Quarterly Journal of Economics, 107(2), pp. 407–437.
Marsh, Lawrence C., and David R Cormier (2002), Spline Regression Models, Quantitative Applications in the Social Sciences, Sage Publications, Thousand Oaks.
Mauro, Paolo, Rafael Romeu, Ariel Binder, and Asad Zaman (2013), “A Modern History of Fiscal Prudence and Profligacy”, IMF Working Papers 13/5, International Monetary Fund.
Minea, Alexandru, and Antoine Parent (2012), “Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff and Some Complex Nonlinearities”, Working Papers 8, Association Francaise de Cliometrie.
Padoan, Pier Carlo, Urban Sila, and Paul van den Noord (2012), “Avoiding Debt Traps: Financial Backstops and Structural Reforms”, OECD Economics Department Working Papers 976, OECD Publishing.
Panizza, Ugo, and Andrea Filippo Presbitero (2012), “Public Debt and Economic Growth: Is There a Causal Effect?”, Mo.Fi.R. Working Papers 65.
Panizza, Ugo, and Andrea Filippo Presbitero (2013), “Public Debt and Economic Growth, One More Time”, VoxEU.org, available at: http://www.voxeu.org/article/public-debt-and-economic-growth-one-more-time.
Perotti, Roberto (2012), “The ‘Austerity Myth’: Gain without Pain?”, in: Fiscal Policy after the Financial Crisis, NBER Chapters. National Bureau of Economic Research, Inc.
Presbitero, Andrea F. (2012), “Total Public Debt and Growth in Developing Countries”, European Journal of Development Research, 24(4), pp. 606–626.
Ramey, Garey, and Valerie A Ramey (1995), “Cross-Country Evidence on the Link between Volatility and Growth”, American Economic Review, 85(5): pp. 1138–1151.
Ramey, Valerie A. (2012), “Discussion of Fiscal Policy in a Depressed Economy by B. J. DeLong, and L. H. Summers”, Brookings Papers on Economic Activity.
Reinhart, Carmen M., Vincent R. Reinhart, and Kenneth S. Rogoff (2012), “Public Debt Overhangs: Advanced-Economy Episodes since 1800”, Journal of Economic Perspectives, 26(3), pp. 69–86.
Reinhart, Carmen M., and Kenneth S. Rogoff (2010), “Growth in a Time of Debt”, American Economic Review, 100(2), pp. 573–578.
Reinhart, Carmen M., and Kenneth S. Rogoff (2011), “From Financial Crash to Debt Crisis”, American Economic Review, 101(5), pp. 1676–1706.
Rodrik, Dani (2008), “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, 39(2 (Fall)), pp. 365–439.
Roodman, David (2009), “A Note on the Theme of too Many Instruments”, Oxford Bulletin of Economics and Statistics, 71(1), pp. 135–158.
Sachs, Jeffrey D. (1989), “The Debt Overhang of Developing Countries”, in: Guillermo A. Calvo, Ronald Findlay, Pentti Kouri, and Jorge Braga de Macedo (eds.), Debt, Stabilization and Development. Basil Blackwell, Oxford.
This paper was prepared for a special issue of the Swiss Journal of Economics and Statistics. We would like to thank the editor, Professor Klaus Neusser, for inviting us to write the paper and participants at the conference “The Swiss Debt Brake — Ten Years On” at the Gerzensee Study Center for helpful comments and suggestions. The usual caveats apply.
About this article
Cite this article
Panizza, U., Presbitero, A.F. Public debt and economic growth in advanced economies: A survey. Swiss J Economics Statistics 149, 175–204 (2013). https://doi.org/10.1007/BF03399388
- Government Debt
- OECD countries