Lof, Μ. & Malinen, Τ. (2014) “Determinants of the growth and sovereign debt correlation“, VoxEU Organisation, 25 May.
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%.
Relevant posts:
- Apergis, N. and Cooray, A. (2013) “New Evidence on the Remedies of the Greek Sovereign Debt Problem”, Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper No.79, November.
- Schoder, C., Proano, C. and Semmler, W. (2013) “The Role of Financial Stress in the Sovereign Debt-Output Nexus, and in Economic Activity“, EconoMonitor, 18 November.
- Mody, Ash. (2013) “Sovereign debt and its restructuring framework in the euro area“, Bruegel Think Tank, 12 August.