New Evidence on Debt as an Obstacle for US Economic Growth

23 Pages Posted: 8 Apr 2019

See all articles by Thomas J. Grennes

Thomas J. Grennes

North Carolina State University - Department of Economics

Qingliang Fan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

Mehmet Caner

North Carolina State University - Department of Economics

Date Written: April 8, 2019

Abstract

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

Grennes, Thomas J. and Fan, Qingliang and Caner, Mehmet, New Evidence on Debt as an Obstacle for US Economic Growth (April 8, 2019). Mercatus Research Paper. Available at SSRN: https://ssrn.com/abstract=3368311 or http://dx.doi.org/10.2139/ssrn.3368311

Thomas J. Grennes (Contact Author)

North Carolina State University - Department of Economics ( email )

4110 Nelson
Raleigh, NC 27695-8110
United States
919-513-2881 (Phone)
919-515-6268 (Fax)

HOME PAGE: http://www.ag-econ.ncsu.edu/faculty/grennes/PubsGrennes.htm

Qingliang Fan

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 312, Economics Building
Xiamen, Fujian 361005
China

HOME PAGE: http://michaelqfan.weebly.com

Mehmet Caner

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

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