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Public Debt and Growth

Author/Editor: Kumar, Manmohan S. | Woo, Jaejoon
Authorized for Distribution: July 1, 2010
Electronic Access: Free Full Text (PDF file size is 1,386KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper explores the impact of high public debt on long-run economic growth. The analysis, based on a panel of advanced and emerging economies over almost four decades, takes into account a broad range of determinants of growth as well as various estimation issues including reverse causality and endogeneity. In addition, threshold effects, nonlinearities, and differences between advanced and emerging market economies are examined. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth. Analysis of the components of growth suggests that the adverse effect largely reflects a slowdown in labor productivity growth mainly due to reduced investment and slower growth of capital stock.
 
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Series: Working Paper No. 10/174
Subject(s): Capital | Economic growth | Gross domestic product | Labor productivity | Low-income developing countries | Public debt
Author's keyword(s): Government debt | growth | growth accounts | crowding out | thresholds | capital per worker | total factor productivity
 
English  
    Published:   July 1, 2010        
            Format:   Paper
    Stock No:   WPIEA2010174   Pages:   47
    Price:   US$18.00
       
     
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