On the public debt and growth threshold: one size does not necessarily fit all

Abstract

ABSTRACT In a time of high debt and sluggish economic growth, the Reinhart and Rogoff (2010) conjecture of a common 90% debt threshold for advanced economies triggered a controversial debate among economists and policy-makers. We analyse the relationship between public debt and economic growth for a sample of 20 advanced economies over the period of 1880–2010, using a regression kink model with an unknown threshold proposed by Hansen (2017). We show that the relationship between public debt and economic growth is time-varying and state-dependent. Particularly, the public debt and economic growth relationship is instable for each country in the sample across the whole period of 1880–2010, and the postwar period of 1950–2010, and subject to data and country heterogeneities. These findings reject the existence of any common threshold fitting all countries and call for more theory-based models that take into account fundamentals that vary between countries and impact debt–growth interactions.