Date added: May 2020

Christian Breuer, Carsten Colombier

FiFo / Mai 2020 / Discussion Paper, FiFo-Köln

In this present paper, we examine the relationship between public debt and economic growth in a large historical panel dataset of 17 OECD economics over the period from 1870 to 2016. In contrast, the relevant literature focuses on the post-WW-II period. Several empirical studies provide evidence in support of the 'conventional view' that public debt is adversely associated with economic growth. We show that the relation-ship between government debt and per-capita GDP growth is neither statistically significant and robust nor unambiguous regarding the sign. While our baseline regressions support the 'conventional view', particularly in the aftermath of World War II, these results are not robust to alternative specifications. This holds for a linear as well as a non-linear relationship between public debt and economic growth. Our outcome suggests that politicians should exercise great caution in using empirical studies on the debt-growth nexus as a guidance for fiscal policy and that further in-depth analyses are needed.

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