Growth Implosions and Debt Explosions: Do Growth Slowdowns Cause Public Debt Crises?

38 Pages Posted: 19 Jan 2001

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Date Written: January 2001

Abstract

The worldwide growth slowdown after 1975 was a major negative fiscal shock; lower growth lowers the present value of tax revenues and primary surpluses and thus makes a given level of debt more burdensome. Most countries failed to adjust to the negative fiscal consequences of the growth implosion and so public debt to GDP ratios exploded. The growth slowdown therefore played an important role in the debt crisis of the middle income countries in the 1980s, the crisis of the Highly Indebted Poor Countries (HIPCs) in the 1980s and 1990s, and the increased public debt burden of industrial countries in the 1980s and 1990s. Econometric tests and fiscal solvency accounting confirm the important role of growth in debt crises. In addition, the HIPCs' debt problems were worse because they grew more slowly after 1975 than other low income countries due to worse policies.

Keywords: fiscal policy, public debt, budget deficits, economic growth

JEL Classification: E6, H6, O4

Suggested Citation

Easterly, William, Growth Implosions and Debt Explosions: Do Growth Slowdowns Cause Public Debt Crises? (January 2001). Available at SSRN: https://ssrn.com/abstract=256881 or http://dx.doi.org/10.2139/ssrn.256881

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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