Do higher public debt levels reduce economic growth?

Abstract

While the effect of higher public debt levels on economic growth has received much attention, the literature partly points to contradictory results. This paper applies meta‐regression methods to 816 estimates from 47 primary studies. The unweighted mean of the reported results suggests that a 10 percentage points increase in public‐debt‐to‐GDP is associated with a decline in annual growth rates by 0.14 percentage points, with a 95% confidence interval from 0.09 to 0.19 percentage points. However, we cannot reject a zero effect after correcting for publication bias. Furthermore, the meta‐regression analysis shows that tackling endogeneity between public debt and growth leads to less adverse effects of public debt. In testing for nonlinear effects, our results do not point to a uniform public‐debt‐to‐GDP threshold beyond which growth slows. Threshold estimates are sensitive to data and econometric choices. These findings imply a lack of evidence of a consistently negative growth effect of higher public‐debt‐to‐GDP. The main policy implication is that there should be caution with regard to “one‐size‐fits‐all” fiscal policy prescriptions in dealing with higher public debt levels.

Non-linear Impacts of Public Debt on Growth, Investment and Credit: A Dynamic Panel Threshold Approach

“…Our results support some previous studies such as Herndon et al (2014), Pescatori et al (2014), Egert (2015) and Chudik et al (2017). This is also consistent with fi ndings of Heimberger (2021). Note that our estimated threshold value is below those reported in the literature, including Reinhart et al (2012), Cecchetti et al (2012), Woo and Kumar (2015).…”

The return of austerity imperils global health

“…The role of international financial institutions like the IMF and World Bank is key: they can provide grants and low-interest loans to countries in need and can help legitimate expanded public spending to avoid socioeconomic calamity and invest in the social cohesion and human capital necessary for growth, rather than portraying it as evidence of profligate public officials. The first glimmers of hope for such a revamped approach were set in the early pandemic period: IMF Managing Director Kristalina Georgieva called for countries to spend as much as they can to protect health,13 and World Bank Chief Economist Carmen Reinhart advocated that LMICs should ‘first fight the war, then figure out how to pay for it.’11 This has coincided with emerging evidence challenging previous beliefs that high debt levels depress economic growth 14. The need for such expansionary policies remains.…”

“…The first glimmers of hope for such a revamped approach were set in the early pandemic period: IMF Managing Director Kristalina Georgieva called for countries to spend as much as they can to protect health, 13 and World Bank Chief Economist Carmen Reinhart advocated that LMICs should ‘first fight the war, then figure out how to pay for it.’ 11 This has coincided with emerging evidence challenging previous beliefs that high debt levels depress economic growth. 14 The need for such expansionary policies remains.…”

Spurious Precision in Meta-Analysis of Observational Research

“…The choice of estimators is subjective, but the three funnel-based techniques are commonly used in observational research. [34][35][36][37][38][39][40][41] The two selection models are also used often [42][43][44][45][46][47][48][49] and represent the latest incarnations of models in the tradition of Hedges [13][14][15][16] and their simplifications [50][51][52][53][54][55] .…”