New Evidence on Debt as an Obstacle for US Economic Growth
23 Pages Posted: 8 Apr 2019
Date Written: April 8, 2019
The US government debt is now in uncharted waters. From the founding of the nation until 1968, government debt moved up and down without a trend, but over the past 50 years, debt relative to the size of the economy has increased continuously. The United States does not appear to have a coherent debt policy. It is not Greece, and there is no evidence of a likely default on US government bonds in the near future. However, there is evidence that Americans have already borne the costs of high debt levels, and without a reform of policy these costs will continue in the future. Using a new econometric technique for threshold autoregression and a debt measure that includes private debt as well as public debt, we estimate that in the period 1995 to 2014, US economic growth was more than 1 percentage point lower than it would have been at a debt level below the threshold. Other Organisation for Economic Co-operation and Development (OECD) countries also had lower growth rates as a result of high debt levels. Many countries have recently adopted some form of fiscal rule, including balanced budgets, intended to limit debt and raise growth rates. Fiscal rules involve a tradeoff between limiting debt and preserving flexibility to respond to economic shocks. In this paper we discuss problems related to designing optimal fiscal rules.
Keywords: public debt, economic growth, private debt, fiscal policy, fiscal rules, budget deficits
JEL Classification: F3, F4, C5
Suggested Citation: Suggested Citation