Public Debt and Growth: An Assessment of Key Findings on Causality and Thresholds

Michael Ash, Deepanker Basu and Arin Dube provide an innovative new approach for assessing the relationship between public debt and GDP growth in the postwar advanced economies. They find little evidence of a negative relationship. They also consider their results relative to four influential papers that have found a substantial negative relationship between public debt and economic growth, especially when public debt levels exceed 90 percent of GDP.  Ash, Basu and Dube show that these results are highly sensitive to the specific ways in which these alternative models are developed and are not robust to alternative appropriate testing methodologies.

Abstract

We provide a comprehensive assessment of the relationship between public debt and GDP growth in the postwar advanced economies. We use the timing of changes in public debt and growth to account for endogeneity, and find little evidence of a negative relationship. Semi-parametric estimates do not indicate any threshold effects. Finally, we reconcile our results with four recent, influential papers that found a substantial negative relationship, especially when public debt exceeds 90 percent of GDP. These earlier results appear to derive mostly from peculiar parametric specifications of nonlinearities, or use of small samples which amplify the influence of outliers.

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