This Time They are Different: Heterogeneity and Nonlinearity in the Relationship between Debt and Growth

Abstract

We study the long-run relationship between public debt and growth in a large panel of countries. Our analysis takes particular note of theoretical arguments and data considerations in modeling the debt-growth relationship as heterogeneous across countries. We investigatethe issue of nonlinearities (debt thresholds) in both the cross-country and within-country dimensions, employing novel methods and diagnostics from the time-series literature adapted for use in the panel. We find some support for a nonlinear relationship between debt andlong-run growth across countries, but no evidence for common debt thresholds within countries over time.

Keywords: Public debt, Economic growth, Economic models, common factor model, nonlinearity, asymmetric ARDL, debt stock, debt terms, debt threshold, debt burden, external debt, debt thresholds, debt accumulation, government debt, debt overhangs, debt sustainability, debt crises, reserve bank, debt reduction, debt data, sovereign debt, debt stock variable, stock of debt, debt stocks, total debt stock, debt relief, terms of debt, foreign aid, sovereign debt crises, debt problems, international lending, external public debt, debt ratio, net present value of debt, currency debt, foreign currency debt, debt intolerance, private credit

JEL Classification: C23, E62, F34, O11