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Post-crisis Fiscal Policy$
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Carlo Cottarelli, Philip Gerson, and Abdelhak Senhadji

Print publication date: 2014

Print ISBN-13: 9780262027182

Published to MIT Press Scholarship Online: September 2015

DOI: 10.7551/mitpress/9780262027182.001.0001

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The Relationship between Debt Levels and Growth

The Relationship between Debt Levels and Growth

Chapter:
(p.97) 5 The Relationship between Debt Levels and Growth
Source:
Post-crisis Fiscal Policy
Author(s):

Manmohan S. Kumar

Jaejoon Woo

Publisher:
The MIT Press
DOI:10.7551/mitpress/9780262027182.003.0006

This chapter examines the extent to which large public debts will adversely affect investment, productivity, and growth. Drawing on data from a panel of advanced and emerging market economies in the period from 1970 to 2008, it shows that initial debt is inversely related to subsequent growth, controlling for other determinants of growth. On average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated over the medium to long run with a slowdown in real per capita GDP growth of approximately 0.2 percentage points per year, with the impact somewhat smaller in advanced economies than in emerging market economies. Some evidence indicates nonlinearity, with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Moreover, when a country's economic and financial position vis-à-vis the rest of the world is weak or the share of its foreign currency-denominated debt is large, the adverse impact of initial public debt on subsequent growth tends to be much more pronounced than when these factors are at more moderate levels.

Keywords:   public debt, investment, productivity, emerging market economies, debt-to-GDP ratio, GDP growth, advanced economies, foreign currency, GDP

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