Debt and Growth: Is There a Magic Threshold?

IMF Working Papers, February 13, 2014

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Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, the authors find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised.
The debt trajectory can be as important as the debt level in understanding future growth prospects: countries with high but declining debt appear to grow equally as fast as countries with lower debt.
There is some evidence that higher debt is associated with a higher degree of output volatility.

Empirical approach: described as a "novel empirical approach" (details are part of the Working Paper).
Dataset: an extensive dataset developed by the Fiscal Affairs Department of the IMF.
Focus: relationship between public debt (GDP ratio and trajectory) and medium-term growth prospects, including output volatility and growth rates.

No single debt-to-GDP threshold was identified that reliably predicts sharply lower medium-term growth outcomes.
Debt dynamics matter: improving debt trajectories (declining debt) can offset the negative associations typically attributed to higher debt levels when assessing future growth.
Higher debt may not uniformly reduce growth but may increase output volatility, which has implications for macroeconomic stability assessments.

This content summarizes findings from an IMF Working Paper authored by Andrea Pescatori, Damiano Sandri, and John Simon.

Source: Debt and Growth: Is There a Magic Threshold? By Andrea Pescatori, Damiano Sandri, John Simon, February 13, 2014.