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

by: Michael Ash, Deepankar Basu, Arindrajit Dube

April 24, 2017 |
Working Paper

Using a sample of 22 advanced economies over the period, 1956-2003, Michael Ash, Deepankar Basu and Arindrajit Dube present an evaluation of recent research that claims that high public debt causes slower economic growth. They find that the negative effect of public debt on economic growth is significantly smaller than found in the existing literature and that the effect disappears after the 1970s. They also find that the impact of public debt on economic growth is not significantly different for elevated levels of debt. Assertions that debt reduction is likely to produce higher growth appear to be at odds with empirical evidence.

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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