Nonlinearities in the Relationship Between Debt and Growth: (No) Evidence From Over Two Centuries

Abstract

A note on versions:The version presented here may differ from the published version or from the version of record. If you wish to cite this item you are advised to consult the publisher's version. Please see the repository url above for details on accessing the published version and note that access may require a subscription.For more information, please contact eprints@nottingham.ac.uk Nonlinearities in the relationship between debt and growth: (no) evidence from over two centuries 2 Abstract: I revisit the popular concern over a nonlinearity or threshold in the relationship between public debt and growth employing long time series data from up to 27 countries. My empirical approach recognises that standard time series arguments for long-run equilibrium relations between integrated variables (cointegration) break down in nonlinear specifications such as those predominantly applied in the existing debt-growth literature. Adopting the novel co-summability approach my analysis overcomes these difficulties to find no evidence for a systematic long-run relationship between debt and growth in the bivariate and economic theory-based multivariate specifications popular in this literature.Keywords: public debt; economic growth; nonlinearity; summability and co-summability JEL classification: H63, C22, E62, O40 3 1 Introduction "The latest research [by Reinhart and Rogoff] suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant."George Osborne, Mais Lecture, February 24, 2010 "The study [Reinhart and Rogoff (2010b)] found conclusive empirical evidence that total debt exceeding 90 percent of the economy has a significant negative effect on economic growth."'The Path to Prosperity,' House Committee on the Budget, April 5, 2011 Despite the rhetoric adopted by a number of governments and opposition parties over recent years, determining a causal link from public debt to long-run growth as well as the potential nonlinearity of this relationship are widely regarded as unresolved empirical issues (IMF, 2012;Panizza and Presbitero, 2014). As above quotes indicate the most influential research on the debt-growth nexus in recent years is unarguably the work by Reinhart and Rogoff (2010b) which has been adopted as justification for fiscal austerity measures by politicians on both sides of the Atlantic. Although recent revelations challenged the descriptive analysis carried out in their paper, Reinhart and Rogoff 4 maintain that "the weight of the evidence to date -including this latest comment [by Herndon, Ash and Pollin, 2014] -seems entirely consistent with our original interpretation of the data" (Wall Street Journal 'Real Time Economics' blog, April 16, 2013), namely that "high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes" (Reinhart and Rogoff, 2010b: 577; see also Rogoff, 2013). Perhaps aware of the tension between the causal interpretation typically read into this type of statement and ...

Causality between Public Debt and Real Growth in the OECD: A Country‐by‐country Analysis

“…They are known to be wide in this setting, evidencing instability in the relationship (Arcabi¢ et al, 2016). Indeed, Eberhardt (2016) finds little evidence of non-linearities. Thus, we focus on a linear specification given the mixed evidence of non-linearity in the literature, wide confidence intervals for threshold parameters, and lack of robustness for sub-sample analyses, which suggest that some findings of non-linearity may be driven by outliers.…”

“…Balasonne et al (2011) adopt unit root and cointegration tests prior to estimation and establish a long-run relationship between per capita GDP, capital and the debt-to-GDP ratio. Indeed, Eberhardt (2016) finds little evidence of non-linearities. But this form of interaction between a threshold dummy and the debt-to-GDP ratio is not defined under cointegration.…”

“…But this form of interaction between a threshold dummy and the debt-to-GDP ratio is not defined under cointegration. Eberhardt (2016) addresses this issue by employing summability tests. However, he exogenously imposes a threshold in the analysis, which has been shown to generate evidence of non-linearity when none exists (Donayre, 2014).…”

Persistence, Mean Reversion and Nonlinearities in Inflation Rates of Developed and Developing Countries Using Over One Century of Data

“…() (available for download at: http://www.macrohistory.net/data/) for the period 1871–2013, primarily for the developed countries, with the data updated till 2016 from the macroeconomic indicators database of the Organisation for Economic Co‐operation and Development (OECD). Except for Russia and South Africa, Data for the developing economies till 2010 are derived from Eberhardt (forthcoming) (with the data available for download from: https://sites.google.com/site/medevecon/publications-and-working-papers). Data for Russia and South Africa comes from the Global Financial Database.…”

Wpływ zadłużenia publicznego na dynamikę wzrostu gospodarczego w krajach Europy Środkowo-Wschodniej

“…Jednak po zastosowaniu zmiennej instrumentalnej silnie skorelowanej z wielkością długu publicznego zależność wzrostu PKB od długu przestaje być istotna. Eberhardt (2017), wykorzystując analizę kointegracyjną obejmującą 27 krajów, również nie znalazł dowodów na oddziaływanie długu publicznego na wzrost PKB. Co istotne autor ten, podobnie jak Reinhart i Rogoff, wykorzystał w swoim badaniu bardzo długie szeregi czasowe, sięgające nawet 1800 r.…”