 The Dynamics of Government Debt and Economic GrowthNo 359, IEG Working Papers from Institute of Economic Growth Abstract: The dynamics of government debt and economic growth, once a subject of interest to very few macroeconomists, is suddenly of immense attention for many researchers in the backdrop of the Eurozone sovereign debt crisis and of related research by Reinhart and Rogoff. This study investigates the government debt-growth relationship and contributes to the literature in the following ways. First, we extend the horizon of analysis to several country groupings and make the study inclusive of economic, political, and regional diversities—based on a sizeable dataset. Second, we provide evidence for the presence of a causal link going from debt to growth with the use of ‘instrumental variables approach', unlike Reinhart and Rogoff's approach. Third, we overcome the issues related to data adequacy, coverage of countries, heterogeneity, endogeneity, and non-linearities by conducting a battery of robustness tests. We find that a 10-percentage-point increase in the debt-to-GDP ratio is associated with 2—23 basis point reduction in average growth. Our results establish the non-linear relationship between debt and growth. Keywords: Government debt; economic growth; debt thresholds; panel data; non-linearity; country groupings (search for similar items in EconPapers) Published as Institute of Economic Growth, Delhi, 2015, pages 1-45 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:awe:wpaper:359 Access Statistics for this paper More papers in IEG Working Papers from Institute of Economic Growth |
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