Friday, February 1, 2013

Higher Government Debt To GDP Slows Economic Growth In The Post War (After 1954) Period: Linear Relationship But No Tipping Point: Federal Reserve Board Research

Posted by Milton Recht:

From Federal Reserve Board Working Papers, 2013-05, December 2012, "Government Debt and Macroeconomic Activity: A Predictive Analysis for Advanced Economies" by Deniz Baglan and Emre Yoldas:
For countries with chronically high debt ratios, GDP growth slows as relative government debt increases, but we find no significant threshold effect.

We contribute to the empirical literature on the relationship between government debt and economic activity by putting the Reinhart and Rogo (2010) data set for the post-war period in a formal statistical context. We aim to determine whether a higher level of debt to GDP ratio predicts slower GDP growth in the medium term, as opposed to investigating the steady state relationship between growth in per capita income and public debt, which is the focus of the aforementioned studies.
Our findings can be summarized as follows.
there is a significant negative linear predictive relationship between debt to GDP and GDP growth for countries with chronivally [sic] high debt to GDP ratios but we do not find evidence for a debt tipping point for such countries. [Emphasis added.]

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