We begin by reiterating some of the main results of Reinhart and Rogoff (2010a).
The basic exercise and key results
Our analysis was based on newly compiled data on forty-four countries spanning about two hundred years. This amounts to 3,700 annual observations and covers a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances.
The main findings of that study are:
- First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP.1 Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The threshold for public debt is similar in advanced and emerging economies and applies for both the post World War II period and as far back as the data permit (often well into the 1800s).
- Second, emerging markets face lower thresholds for total external debt (public and private) ā which is usually denominated in a foreign currency. When total external debt reaches 60% of GDP, annual growth declines about 2%; for higher levels, growth rates are roughly cut in half.
- Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the US, have experienced higher inflation when debt/GDP is high). The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Figure 1 summarises our main conclusions as they apply to the 20 advanced countries in our 44-country sample. We will concentrate here on the advanced countries, as that is where much of the public debate is centred.2
In the figure, the annual observations are grouped into four categories, according to the ratio of debt-to GDP during that particular year. Specifically years when debt-to-GDP levels were:
- below 30 percent;
- 30 to 60 percent;
- 60 to 90 percent; and
- above 90%.3
The bars show average and median GDP growth for each of the four debt categories. Note that of the 1,186 annual observations, there are a significant number in each category, including 96 above 90%. (Recent observations in that top bracket come from Belgium, Greece, Italy, and Japan.)
From the figure, it is evident that there is no obvious link between debt and growth until public debt exceeds the 90% threshold. The observations with debt to GDP over 90% have median growth roughly 1% lower than the lower debt burden groups and mean levels of growth almost 4% lower. (Using lagged debt does not dramatically change the picture.) The line in Figure 1 plots the median inflation for the different debt groupings ā which makes clear that there is no apparent pattern of simultaneous rising inflation and debt.
Figure 1. Government debt, growth, and inflation: Selected advanced economies, 1946-2009
Notes: Central government debt includes domestic and external public debts. The 20 advanced economies included are Australia. Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the UK, and the US. The number of observations for the four debt groups are: 443 for debt/GDP below 30%; 442 for debt/GDP 30 to 60%; 199 observations for debt/GDP 60 to 90%; and 96 for debt/GDP above 90%. There are 1,180 observations. Sources: Reinhart and Rogoff (2010a) and sources cited therein.
