Cecchetti, Mohanty and Zampolli The real effects of debt
The real effects of debt
Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli*
September 2011
Abstract
At moderate levels, debt improves welfare and enhances growth. But high levels can be
damaging. When does debt go from good to bad? We address this question using a new
dataset that includes the level of government, non-financial corporate and household debt in
18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain
level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP.
The immediate implication is that countries with high debt must act quickly and decisively to
address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer
required to address extraordinary events, governments should keep debt well below the
estimated thresholds. Our examination of other types of debt yields similar conclusions.
When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for
household debt, we report a threshold around 85% of GDP, although the impact is very
imprecisely estimated.
* Cecchetti is Economic Adviser at the Bank for International Settlements (BIS) and Head of its Monetary and
Economic Department; Mohanty is Head of the Macroeconomic Analysis Unit at the BIS; and Zampolli is
Senior Economist at the BIS. This paper was prepared for the “Achieving Maximum Long-Run Growthâ€
symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming,
25–27 August 2011. We thank Enisse Kharroubi for insightful discussions; Dietrich Domanski, Mathias
Drehmann, Leonardo Gambacorta, Előd Takáts, Philip Turner and Christian Upper for suggestions;
participants at the Jackson Hole symposium for numerous comments; Christian Dembiermont, Marjorie
Santos and Denis Marionnet for their special efforts in putting together the dataset on non-financial sector
debt; and J