Tuesday, April 24, 2012

Is high public debt harmful for economic growth?

Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. This column presents new evidence challenging this view.

The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made.

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
-- Mark Twain

Do high levels of public debt reduce economic growth? This is an important policy question. A positive answer would imply that, even if effective in the short-run, expansionary fiscal policies that increase the debt-to-GDP ratio may reduce long-run growth, and thus partly (or fully) negate the positive effects of the fiscal stimulus. Read More