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Determinants of the growth and sovereign debt correlation

Lof, Μ. & Malinen, Τ. (2014) “Determinants of the growth and sovereign debt correlation“, VoxEU Organisation, 25 Μαΐου.

 

Public debt and economic growth are historically negatively correlated. This column discusses new evidence that rejects the debt-to-growth causality. After estimating the effects between debt and growth in both directions, there is no evidence that high indebtedness suppresses economic growth. The effect of growth on debt is the main driver of the negative correlation.

Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.

 

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