Debt and growth: Breaking the threshold

CAN countries imperil their growth prospects by having too much debt? In 2010 Carmen Reinhart and Kenneth Rogoff of Harvard University argued that countries experience a sharp slowdown in growth when their public debt-to-GDP ratios hit 90%. Not everyone was convinced. Then in 2013 three economists at University of Massachusetts Amherst found that spreadsheet errors had skewed their results.A new IMF paper now poses a more substantial challenge to Ms Reinhart and Mr Rogoff’s thesis. Using data for debt and growth from 1821 to 2012, the authors found that growth in GDP per head is slower in countries with a debt-to-GDP ratio above 90% when looking at the data year-by-year (see left-hand chart). But many of these slowdowns were produced by factors unrelated to debt levels. For instance, the growth figures for countries with debts of more than 135% of GDP are depressed mainly because the debt-laden Japanese and German economies collapsed in 1945.If one looks at average debt levels over 15-year periods instead, there is no evidence that countries with debt of above 80% of GDP grow more slowly (see right-hand chart). Even countries with debt ratios of more...

via The Economist: Finance and economics Business Feeds

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