Hostname: page-component-7b7567c8c-wxvwp Total loading time: 0 Render date: 2026-11-15T21:31:41.673Z Has data issue: false hasContentIssue false
  • English
  • Français

NONLINEARITIES IN THE RELATIONSHIP BETWEEN DEBT AND GROWTH: (NO) EVIDENCE FROM OVER TWO CENTURIES

Published online by Cambridge University Press:  18 September 2017

Markus Eberhardt
Markus Eberhardt*
Affiliation:
University of Nottingham
*
Address correspondence to: Markus Eberhardt, School of Economics, Sir Clive Granger Building, University of Nottingham, University Park, Nottingham NG7 2RD, UK; e-mail: markus.eberhardt@nottingham.ac.uk.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

I revisit the popular concern over a nonlinearity or threshold in the relationship between public debt and growth employing long time series data from up to 27 countries. My empirical approach recognizes that standard time series arguments for long-run equilibrium relations between integrated variables (cointegration) break down in nonlinear specifications such as those predominantly applied in the existing debt–growth literature. Adopting the novel cosummability approach, my analysis overcomes these difficulties to find no evidence for a systematic long-run relationship between debt and growth in the bivariate and economic theory-based multivariate specifications popular in this literature.

Keywords

Public DebtEconomic GrowthNonlinearitySummability and Cosummability

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019, pp. 1563 - 1585
Copyright
Copyright © Cambridge University Press 2017 

Footnotes

I am indebted to Vanessa Berenguer-Rico, Matei Demetrescu, Gerdie Everaert, and Andrea Presbitero for helpful comments and suggestions. Vanessa also kindly provided the Gauss code that forms the basis for the time series analysis carried out in Gauss. Comments and suggestions from two anonymous referees that helped to significantly improve the paper are also gratefully acknowledged. The usual disclaimers apply.

References

REFERENCES

Balassone, Fabrizio, Francese, Maura and Pace, Angelo (2011) Public Debt and Econ omic Growth in Italy. Bank of Italy Economic History working papers #11.Google Scholar
Barro, Robert J (1991) Economic growth in a cross-section of countries. Quarterly Journal of Economics 106 (2), 407–443.Google Scholar
Baum, Anja, Checherita-Westphal, Cristina and Rother, Philipp (2013) Debt and growth: New evidence for the euro area. Journal of International Money and Finance 32, 809–821.Google Scholar
Berenguer-Rico, Vanessa and Gonzalo, Jesus (2014a) Co-Summability: From Linear to Non-Linear Co-Integration. (Unpublished Mimeo). Available at https://sites.google.com/site/vanessaberenguerricoGoogle Scholar
Berenguer-Rico, Vanessa and Gonzalo, Jesus (2014b) Summability of stochastic processes: A generalization of integration and co-integration valid for non-linear processes. Journal of Econometrics 178 (2), 331–341.Google Scholar
Blundell, Richard and Bond, Stephen (1998) Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87 (1), 115–143.Google Scholar
Bun, Maurice J. G. and Sarafidis, Vasilis (2015) Dynamic panel data models. In Baltagi, Badi H. (ed.), The Oxford Handbook of Panel Data, 2015, pp. 76–110. Oxford: Oxford University Press.Google Scholar
Calderon, Cesar and Fuentes, J. Rodrigo (2013) Government Debt and Economic Growth. Inter-American Development Bank working paper series No. IDB-WP-424.Google Scholar
Cecchetti, Stephen, Mohanty, Madhusudan and Zampolli, Fabrizio (2011) Achieving growth amid fiscal imbalances: The real effects of debt. In Economic Symposium Conference Proceedings, pp. 145–196. Kansas City: Federal Reserve Bank of Kansas City.Google Scholar
Checherita-Westphal, Cristina and Rother, Philipp (2012) The impact of high government debt on economic growth and its channels: An empirical investigation for the Euro area. European Economic Review 56 (7), 1392–1405.Google Scholar
Chinn, Menzie (2012) Book review: ‘A Decade of Debt.’ By Reinhart, Carmen M. and Rogoff, Kenneth S.. Journal of Economic Literature 50 (2), 525–527.Google Scholar
Cordella, Tito, Ricci, Luca Antonio and Ruiz-Arranz, Marta (2010) Debt overhang or debt irrelevance? IMF Staff Papers 57 (1), 1–24.Google Scholar
Dippelsman, Robert, Dziobek, Claudia Helene and Mangas, Carlos Gutierrez (2012) What Lies Beneath: The Statistical Definition of Public Sector Debt. Washington, D.C., USA: International Monetary Fund.Google Scholar
Durlauf, Steven N., Johnson, Paul A. and Temple, Jonathan R. W. (2005) Growth econometrics. In Aghion, Philippe and Durlauf, Steven (eds.), Handbook of Economic Growth, pp. 555–677, chapter 8. Amsterdam: Elsevier.Google Scholar
Eberhardt, Markus and Presbitero, Andrea F. (2015) Public debt and growth: Heterogeneity and non-linearity. Journal of International Economics 97 (1), 45–58.Google Scholar
Eberhardt, Markus and Teal, Francis (2011) Econometrics for grumblers: A new look at the literature on cross-country growth empirics. Journal of Economic Surveys 25 (1), 109–155.Google Scholar
Elmendorf, Douglas W. and Mankiw, Gregory N. (1999) Government debt. In Taylor, J. B. and Woodford, M. (eds.), Handbook of Macroeconomics, pp. 1615–1669, chapter 25. Amsterdam: Elsevier.Google Scholar
Engle, Robert F. and Granger, Clive W. J. (1987) Cointegration and Error correction: Representations, estimation and testing. Econometrica 55 (2), 252–276.Google Scholar
Ghosh, Atish R., Kim, Jun I., Mendoza, Enrique G., Ostry, Jonathan D. and Qureshi, Mahvash S. (2013) Fiscal fatigue, fiscal space and debt sustainability in advanced economies. The Economic Journal 123 (566), F4–F30.Google Scholar
Gonzalo, Jesus and Pitarakis, Jean-Yves (2006) Threshold effects in co-integrating regressions. Oxford Bulletin of Economics and Statistics 68, 813–833.Google Scholar
Greiner, Alfred (2011) Economic growth, public debt and welfare: Comparing three budgetary rules. German Economic Review 12 (2), 205–222.Google Scholar
Henderson, Daniel and Parmeter, Christopher (2013) Threshold estimation in nonparametric regression: Government debt and economic growth. Paper presented at the 4th CREA Rimini Workshop on Developments in Macro and Growth, May 23–24.Google Scholar
Herndon, Thomas, Ash, Michael and Pollin, Robert (2014) Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Cambridge Journal of Economics 38 (2), 257–279.Google Scholar
IDB [Inter-American Development Bank] (2006) Living with Debt: How to Limit the Risks of Sovereign Finance. Cambridge, MA: Harvard University Press.Google Scholar
IMF [International Monetary Fund] (2012) World Economic Outlook – Coping with High Debt and Sluggish Growth. Washington, D.C., USA: International Monetary Fund.Google Scholar
Kourtellos, Andros, Stengos, Thanasis and Tan, Chih Ming (2013) The effect of public debt on growth in multiple regimes. Journal of Macroeconomics 38, 35–43.Google Scholar
Kraay, Aart and Nehru, Vikram (2006) When is external debt sustainable? World Bank Economic Review 20 (3), 341–365.Google Scholar
Krugman, Paul (1988) Financing vs. forgiving a debt overhang. Journal of Development Economics 29 (3), 253–268.Google Scholar
Kumar, Manmohan S. and Woo, Jaejoon (2010) Public Debt and Growth. IMF Working Papers 10/174 International Monetary Fund.Google Scholar
Maddison, Angus (1992) A long-run perspective on saving. The Scandinavian Journal of Economics 94 (2), 181–196.Google Scholar
Maddison, Angus (2010) Historical Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD. Dataset and Documentation provided at the University of Groningen.Google Scholar
Manasse, Paolo and Roubini, Nouriel (2009) Rules of thumb for sovereign debt crises. Journal of International Economics 78 (2), 192–205.Google Scholar
Mankiw, N. Gregory, Romer, David and Weil, David N. (1992) A contribution to the empirics of economic growth. The Quarterly Journal of Economics 107 (2), 407–437.Google Scholar
Mitchell, Brian (2007a) International Historical Statistics 1750–2005: Africa, Asia and Oceania, 5th ed. Basingstoke: Palgrave Macmillan.Google Scholar
Mitchell, Brian (2007b) International Historical Statistics 1750–2005: Europe, 6th ed. Basingstoke: Palgrave Macmillan.Google Scholar
Panizza, Ugo and Presbitero, Andrea F. (2013) Public debt and economic growth in advanced economies: A survey. Swiss Journal of Economics and Statistics 149 (2), 175–204.Google Scholar
Panizza, Ugo and Presbitero, Andrea F. (2014) Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics 41, 21–41.Google Scholar
Park, J. Y. and Phillips, P. C. B. (2001) Nonlinear regressions with integrated time series. Econometrica 69, 117–161.Google Scholar
Pesaran, M. Hashem and Smith, Ron P. (1995) Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics 68 (1), 79–113.Google Scholar
Politis, Dimitris, Romano, Joseph and Wolf, Michael (1999) Subsampling. New York: Springer.Google Scholar
Presbitero, Andrea F (2012) Total public debt and growth in developing countries. European Journal of Development Research 24 (4), 606–626.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2009) This Time is Different–Eight Centuries of Financial Folly. Princeton, New Jersey: Princeton University Press.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2010a) Debt and Growth Revisited. MPRA paper 24376 University Library of Munich, Germany.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2010b) Growth in a time of debt. American Economic Review Papers and Proceedings 100 (2), 573–578.Google Scholar
Reinhart, Carmen M. and Rogoff, Kenneth S. (2011) A Decade of Debt, Policy Analyses in International Economics, vol. 95. Washington D.C.: Peterson Institute for International Economics.Google Scholar
Reinhart, Carmen M., Rogoff, Kenneth S. and Savastano, Miguel A. (2003) Debt intolerance. Brookings Papers on Economic Activity 34 (1), 1–74.Google Scholar
Reinhart, Carmen M., Reinhart, Vincent R. and Rogoff, Kenneth S. (2012) Public debt overhangs: Advanced-economy episodes since 1800. Journal of Economic Perspectives 26 (3), 69–86.Google Scholar
Rogoff, Kenneth (2013) FAQ on Herndon, Ash and Pollin's Critique of ‘Growth in a Time of Debt.’ Technical report. Available on Rogoff's website at http://tinyurl.com/ot8h53e, October.Google Scholar
Sachs, Jeffrey D (1989) The debt overhang of developing countries. In Calvo, Guillermo A., Findlay, Ronald, Kouri, Pentti and de Macedo, Jorge Braga (eds.), Debt, Stabilization and Development, Oxford: Blackwell.Google Scholar
Teles, Vladimir K. and Mussolini, Caio Cesar (2014) Public debt and the limits of fical policy to increase economic growth. European Economic Review 66, 1–15.Google Scholar