Debt Overhangs: Past and Present

29 Pages Posted: 28 Apr 2012 Last revised: 24 Mar 2022

See all articles by Carmen Reinhart

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Vincent R. Reinhart

American Enterprise Institute (AEI)

Kenneth Rogoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2012

Abstract

We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90% for at least five years. Consistent with Reinhart and Rogoff (2010) and other more recent research, we find that public debt overhang episodes are associated with growth over one percent lower than during other periods. Perhaps the most striking new finding here is the duration of the average debt overhang episode. Among the 26 episodes we identify, 20 lasted more than a decade. Five of the six shorter episodes were immediately after World Wars I and II. Across all 26 cases, the average duration in years is about 23 years. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that cumulative shortfall in output from debt overhang is potentially massive. We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates.

Suggested Citation

Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Vincent R. and Rogoff, Kenneth S., Debt Overhangs: Past and Present (April 2012). NBER Working Paper No. w18015, Available at SSRN: https://ssrn.com/abstract=2047266

Carmen Reinhart (Contact Author)

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Vincent R. Reinhart

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