Public debt and economic growth, one more time

Ugo Panizza, Andrea Presbitero 25 April 2013



Are high levels of public debt harmful for economic growth? The answer to this question is key for understanding whether expansionary fiscal policies that increase the level of debt will reduce our future standards of living.

In a series of influential articles, Carmen Reinhart and Kenneth Rogoff showed that high levels of public debt are negatively correlated with economic growth, but that there is no link between debt and growth when public debt is below 90% of GDP (Reinhart, Reinhart, and Rogoff 2012; Reinhart and Rogoff 2010). Reinhart and Rogoff were careful in stating that their results did not prove the existence of a causal relationship going from debt to growth. However, many commentators and policymakers did give a causal interpretation to their findings and used the debt-growth link as an argument in support of fiscal consolidation.

In a recent survey of the empirical literature, we summarise evidence on the links between public debt and economic growth in advanced economies (Panizza and Presbitero 2013).

The argument for a debt-to-growth link

Reinhart and Rogoff’s findings sparked a new literature aimed at assessing whether their results were robust to allowing for:

  • Non-arbitrary debt brackets.
  • Control variables in a multivariate regression set-up.
  • Reverse causality; and
  • Cross-country heterogeneity.

The discussion on the relationship between debt and growth in advanced economies has become particularly animated after the publication of a recent article by Herndon, Ash, and Pollin (2013) that challenges some of Reinhart and Rogoff's findings. As the debate is still ongoing, we stay out of this controversy and assess what we knew about the relationship between debt and growth before Herndon, Ash, and Pollin.

Threshold effects

Instead of comparing growth across a set of pre-established brackets, Minea and Parent (2012) study the relationship between debt and growth by using a statistical technique that allows for a gradual change in the estimated relationship between debt and growth. They find complex non-linearity which may not be captured by models that use a set of exogenous thresholds. Egert (2012) uses a variant of the Reinhart and Rogoff dataset and finds that the presence and position of debt thresholds are not robust to small changes in country coverage, data frequency, and econometric specification. By using robust inference techniques, Baglan and Yoldas (2013) find a negative correlation between debt and growth in a subset of countries, but no evidence of a threshold effect.

Papers that study the relationship between debt and growth by controlling for a large set of covariates in a regression set-up find that there is a robust negative correlation between debt and growth in advanced economies (for references, see Panizza and Presbitero 2013). The point estimates are economically significant and suggest that a ten-percentage-point increase in the debt-to-GDP ratio is associated with an 18 basis points decrease in subsequent real-GDP growth. However, our reading of the existing literature suggests that these papers that control for covariate do not find threshold effects. The relationship between debt and growth is negative but fairly stable across different levels of debt. 


The presence of cross-country heterogeneity may lead to large biases in the estimated relationship between debt and growth. Kourtellos, Stengos, and Tan (2012) relax the assumption that the relationship between debt and growth is either constant across countries or only varies with debt levels. They find that the estimated relationship between public debt and economic growth depends on institutional quality, but they do not find evidence of debt thresholds.

Eberhardt and Presbitero (2013) apply new econometric techniques which deal explicitly with a variety of issues related to unobserved heterogeneity and cross-sectional dependence. Their findings cast doubt on the pooled modelling approach used by most papers that study the empirical relationship between debt and growth.


While there is evidence that public debt is negatively correlated with economic growth, correlation does not necessarily imply causality. The link between public debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt. Alternatively, the observed correlation between debt and growth could be due to a third factor that has a joint effect on these two variables.

In Panizza and Presbitero (2012a), we test for causality and do not find evidence in support of the hypothesis that debt causes economic growth. While we are aware that techniques for assessing causality are never watertight, we are confident in stating that, at this point, there is no paper that can make a strong case for a causal relationship from debt to growth. We hope that our work will stimulate more research aimed at uncovering possible causality.

What is public debt?

One issue that is rarely discussed in the empirical literature relates to the definition of public debt itself.

At the end of 2012, average gross debt in OECD countries was close to 110% of the group’s GDP, but net debt was almost 40 percentage points lower (Panizza and Presbitero, 2013, Table 1). While net debt is usually much lower than gross debt, measures of debt that include government’s future implicit liabilities would yield much higher debt ratios. Hagist, Moog, Raffelhuschen, and Vatter (2009) estimate the net present value of future government liabilities and revenues and find that the 'true' debt-to-GDP ratio is often twice as large as gross debt.

Should researchers focus on gross or net debt? Should they concentrate on explicit debt, or also consider the government’s implicit liabilities? Should standard measures of public debt also include the expected value of the government’s contingent liabilities (consider the sudden debt explosions in Iceland, Ireland, and Spain)?

Moreover, it is now recognised that macroeconomic and financial vulnerabilities depend on both debt levels and debt composition (Inter-American Development Bank 2006). Unfortunately, it is hard to find cross-country data on the composition of public debt in advanced and developing economies.

In sum

While there is evidence that public debt is negatively correlated with economic growth, there is no study that makes a strong case for a causal relationship going from debt to growth. Moreover, the presence of debt thresholds and, more generally, of a non-monotonic relationship between debt and growth is not robust to small changes in data coverage and empirical techniques.

Our findings should not be interpreted as suggesting that debt accumulation is not a relevant policy issue or that high debt levels are not a problem in general (for a discussion see Panizza and Presbitero 2012). However, we do think that an assessment of the complex relationship between debt and growth requires more research. In our view, this research should focus on causality and cross-country heterogeneity.


Baglan, Deniz and Emre Yoldas (2013), “Government debt and macroeconomic activity: a predictive analysis for advanced economies”, Finance and Economics Discussion Series, n° 2013-05, Federal Reserve Board.

Eberhardt, Markus and Andrea F Presbitero (2013), “This time they are different: heterogeneity and nonlinearity in the relationship between debt and growth”, manuscript.

Egert, Balazs (2012), “Public debt, economic growth and nonlinear effects: myth or reality?”, OECD Economic Department working paper, n° 993.

Hagist, Christian, Stefan Moog, Bernd Raffelhuschen and Johannes Vatter (2009), “Public debt and demography – An international comparison using generational accounting”, CESifo DICE Report, 7(4): 29-36.

Herndon, Thomas, Michael Ash and Robert Pollin (2013), “Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff”, PERI working paper n° 322, April.

Inter-American Development Bank (2006), Living with Debt: How to Limit the Risks of Sovereign Finance, Harvard University Press, Cambridge, MA.
Kourtellos, Andros, Thanasis Stengos and Chih Ming Tan (2012), “The effect of public debt on growth in multiple regimes”, RCEA working paper, n° 60_12.

Minea, Alexandru and Antoine Parent (2012), “Is high public debt always harmful to economic growth? Reinhart and Rogoff and some complex nonlinearities”, CERDI working papers, n° 2012-18.

Panizza, Ugo and Andrea F Presbitero (2012a), “Public debt and economic growth: is there a causal effect?”, MoFiR working papers, n° 65.

Panizza, Ugo and Andrea F Presbitero (2012b), “Is high public debt harmful for economic growth?”,, 22 April.

Panizza, Ugo and Andrea F Presbitero (2013), “Public debt and economic growth in advanced economies: A survey”, Swiss Journal of Economics and Statistics, forthcoming.

Reinhart, Carmen M, Vincent R Reinhart and Kenneth S Rogoff (2012), “Public debt overhangs: Advanced-economy episodes since 1800”, Journal of Economic Perspectives, 26(3): 69-86.

Reinhart, Carmen M and Kenneth S Rogoff (2010), “Debt and growth revisited”,, 11 August.

1 Reinhart and Rogoff's rebuttal is available on the blogs of The Wall Street Journal and the Financial Times.

2 This, however, is a controversial point. Given the technical nature of the discussion we refer interested readers to Section 3.4 of Panizza and Presbitero (2013).

For details see Section 3.3 of Panizza and Presbitero (2013). A summary is in (Panizza and Presbitero 2012b).



Topics:  Macroeconomic policy

Tags:  Rogoff-Reinhart debate, debt and growth

Professor of Economics and Pictet Chair at the Graduate Institute, Geneva; CEPR Vice president and Research Fellow

Economist, IMF; Assistant Professor (on leave), Università Politecnica delle Marche


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