Growth in a Time of Debt

Growth in a Time of Debt

American Economic Review: Papers & Proceedings 100 (May 2010): 573–578
http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573

Growth in a Time of Debt
By Carmen M. Reinhart and Kenneth S. Rogoff*
In this paper, we exploit a new multi-country
historical dataset on public (government) debt to
search for a systemic relationship between high
public debt levels, growth and inflation.1 Our
main result is that whereas the link between
growth and debt seems relatively weak at “normal” debt levels, median growth rates for countries with public debt over roughly 90 percent
of GDP are about one percent lower than other­
wise; average (mean) growth rates are several
percent lower. Surprisingly, the relationship
between public debt and growth is remarkably
similar across emerging markets and advanced
economies. This is not the case for inflation. We
find no systematic relationship between high
debt levels and inflation for advanced economies as a group (albeit with individual country
exceptions including the United States). By contrast, in emerging market countries, high public
debt levels coincide with higher inflation.
Our topic would seem to be a timely one.
Public debt has been soaring in the wake of the
recent global financial maelstrom, especially in
the epicenter countries. This should not be surprising, given the experience of earlier severe
financial crises.2 Outsized deficits and epic bank
bailouts may be useful in fighting a downturn,
but what is the long-run macroeconomic impact,

especially against the backdrop of graying populations and rising social insurance costs? Are
sharply elevated public debts ultimately a manageable policy challenge?
Our approach here is decidedly empirical,
taking advantage of a broad new historical
dataset on public debt (in particular, central
government debt) first presented in Carmen M.
Reinhart and Kenneth S. Rogoff (2008, 2009b).
Prior to this dataset, it was exceedingly difficult
to get...

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