Work

Stylised fact or situated messiness? The diverse effects of increasing debt on national economic growth

Year: 2014

Type: article

Abstract: This article reanalyses data used by Reinhart and Rogoff (2010c, American Economic Review, 100: 573–78—RR), and later Herndon et al. (2013, Cambridge Journal of Economics, online, doi: 10.1093/cje/bet075) to consider the relationship between growth and debt in developed countries. The consistency over countries and the causal direction of RR’s so called ‘stylised fact’ is considered. Using multilevel models, we find that when the effect of debt on growth is allowed to vary, and linear time trends are fully controlled for, the average effect of debt on growth disappears, whilst country-specific debt relations vary significantly. Additionally, countries with high debt levels appear more volatile in their growth rates. Regarding causality, we develop a new method extending distributed lag models to multilevel situations. These models suggest the causal direction is predominantly growth-to-debt, and is consistent (with some exceptions) across countries. We argue that RR’s findings are too simplistic, with limited policy relevance, whilst demonstrating how multilevel models can explicate realistically complex scenarios.

Source: Journal of Economic Geography

DOI: 10.1093/jeg/lbu005

Authors: Andrew Bell, Ron Johnston, Kelvyn Jones

Institution: University of Bristol

Language: English

Topic: Fiscal Policies and Political Economy

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: University of Bristol, Economic and Social Research Council

Award: G5869958082