Public Debt and Real GDP: Revisiting the Impact

IMF Working Papers, April 29, 2022

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The paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP.
Uses public debt forecast errors to identify exogenous changes in public debt and assess the impact of a change in the debt to GDP ratio on real GDP.
Data analyzed: gross public debt for 178 countries over 1995-2020.
Main aggregate finding: the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics.

Identification strategy: exploit public debt forecast errors to capture unanticipated (exogenous) changes in public debt.
Empirical scope: panel analysis covering 178 countries across 1995-2020 using gross public debt series.

An unanticipated increase in the public debt to GDP ratio hurts real GDP level for:
- countries with a high initial debt level;
- countries with a rising debt trajectory over the five preceding years.
An unanticipated increase in public debt boosts real GDP for:
- countries with a low-income level;
- countries that completed the HIPC debt relief initiative.

Subject: Asset and liability management, Debt relief, External debt, Public debt
Keywords: Debt relief, evolution of public debt, GDP ratio, Global, Growth, IMF predictions, level classification, public debt shock, public debt trajectory, Sovereign Debt