573
American Economic Review: Papers & Proceedings 100 (May 2010): 573–578
http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573
In this paper, we exploit a new multi-country
historical dataset on public (government) debt to
search for a systemic relationship between high
public debt levels, growth and inflation.1 Our
main result is that whereas the link between
growth and debt seems relatively weak at “nor-
mal†debt levels, median growth rates for coun-
tries with public debt over roughly 90 percent
of GDP are about one percent lower than other-
wise; average (mean) growth rates are several
percent lower. Surprisingly, the relationship
between public debt and growth is remarkably
similar across emerging markets and advanced
economies. This is not the case for inflation. We
find no systematic relationship between high
debt levels and inflation for advanced econo-
mies as a group (albeit with individual country
exceptions including the United States). By con-
trast, in emerging market countries, high public
debt levels coincide with higher inflation.
Our topic would seem to be a timely one.
Public debt has been soaring in the wake of the
recent global financial maelstrom, especially in
the epicenter countries. This should not be sur-
prising, given the experience of earlier severe
financial crises.2 Outsized deficits and epic bank
bailouts may be useful in fighting a downturn,
but what is the long-run macroeconomic impact,
1 In this paper “public debt†refers to gross central
government debt. “Domestic public debt†is government
debt issued under domestic legal jurisdiction. Public debt
does not include debts carrying a government guarantee.
Total gross external debt includes the external debts of all
branches of government as well as private debt that is issued
by domestic private entities under a foreign jurisdiction.
2 Reinhart and Rogoff (2009a, b) demonstrate that the
aftermath of a deep financial crisis typically involves a
protracted period of macroecono