The Impact of Government Debt on Growth. An Empirical Investigation for the Euro Area

Cristina Checherita-Westphal and Philipp Rother
Authors registered in the RePEc Author Service: Cristina Checherita Westphal

Revue économique, 2011, vol. 62, issue 6, 1015-1029

Abstract: 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 nonlinear 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. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects.

Date: 2011
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