Working Paper: NBER ID: w15639
Authors: Carmen M. Reinhart; Kenneth S. Rogoff
Abstract: We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)--which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Keywords: Economic Growth; Inflation; Government Debt; External Debt
JEL Codes: E2; E3; E6; F3; F4; N1; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt-to-GDP ratio below 90% (H68) | Weak relationship with real GDP growth (O49) |
| Debt-to-GDP ratio above 90% (H69) | Median growth rates decline by 1% (F62) |
| Debt-to-GDP ratio above 90% (H69) | Average growth rates decline considerably more (F62) |
| External debt-to-GDP ratio above 60% (F34) | Annual growth declines by 2% (O49) |
| External debt-to-GDP ratio above 90% (F34) | Growth rates can be halved (O41) |
| Public debt levels (H63) | No systematic relationship with inflation for advanced economies (E31) |
| Public debt levels (H63) | Higher inflation in some countries at high debt levels (E31) |
| Public debt levels in emerging markets (H63) | Significant rise in inflation as debt increases (E31) |
| Public debt levels above 90% (H63) | Median inflation more than doubles from below 7% to 16% (E31) |