Working Paper: NBER ID: w18015
Authors: Carmen M. Reinhart; Vincent R. Reinhart; Kenneth S. Rogoff
Abstract: We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.
Keywords: public debt; debt overhang; economic growth; real interest rates
JEL Codes: E44; E62; E63; F30; F41; H6; H63; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public debt overhang episodes (H63) | average growth rate (O40) |
| public debt levels exceeding 90% of GDP (H63) | growth rate (O40) |
| high public debt (H69) | lower growth (O40) |
| average duration of public debt overhang (H63) | level of output at end of median episode (E23) |
| high public debt (H69) | growth (O40) |
| high public debt (H69) | persistent lower growth (O41) |