بدهی عمومی یا دولتی و رشد اقتصادی: آیا اثر علّی وجود دارد؟

• We use an IV approach to study if public debt has a causal effect on GDP growth in OECD countries.• We propose a new instrument for public debt based on changes in debt due to valuation effects.• We confirm the presence of a negative correlation between debt and growth.• However, the link between debt and growth disappears once we correct for endogeneity.This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we correct for endogeneity. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction. Our finding that there is no evidence that public debt has a causal effect on economic growth is important in the light of the fact that the negative correlation between debt and growth is sometimes used to justify policies that assume that debt has a negative causal effect on economic growth.

Do high levels of public debt reduce economic growth? This is an important policy question. A positive answer would imply that, even if effective in the short-run, expansionary fiscal policies that increase the level of debt may reduce long-run growth, and thus partly (or fully) negate the positive effects of the fiscal stimulus. Most policymakers do seem to think that high public debt reduces long-run economic growth.1 While a negative effect of government debt on long-run growth is consistent with both neoclassical and endogenous growth models (Diamond, 1965 and Saint-Paul, 1992), back-of-the-envelope estimates suggest that the standard crowding out channel in unlikely to be quantitatively important (Panizza and Presbitero, 2013). Public debt could have a larger negative effect on economic outcomes if it affects the productivity of public expenditures (Teles and Cesar Mussolini, 2014), increases uncertainty or creates expectations of future financial repression (Cochrane, 2011), and increases sovereign risk (Codogno et al., 2003), leading to higher real interest rates and lower private investment (Tanzi and Chalk, 2000 and Laubach, 2009). However, it is also possible to think about scenarios in which expansionary fiscal policies that lead to debt accumulation but avoid protracted recessions end up having a positive effect on both short and long-term growth (DeLong and Summers, 2012). Theoretical arguments that suggest that high public debt has a negative effect on GDP growth are in line with a growing empirical literature which shows that there is a negative non-linear correlation between public debt and economic growth in advanced and emerging market economies (Reinhart and Rogoff, 2009, Reinhart and Rogoff, 2010a, Reinhart and Rogoff, 2010b, Reinhart et al., 2012, Kumar and Woo, 2010, Cecchetti et al., 2011, Checherita-Westphal and Rother, 2012 and Furceri and Zdzienicka, 2012).2 Correlation, however, does not necessarily imply causation. The link between public debt and economic growth could be driven by the fact that it is low economic growth that leads to high levels of debt (Reinhart et al., 2012). Empirically, measuring debt as a ratio to GDP automatically creates a negative correlation between debt and growth and this negative correlation can be amplified by the presence of automatic stabilizers or by discretionary countercyclical fiscal policy. Alternatively, the observed correlation between debt and growth could be due to a third factor that has a joint effect on these two variables (for instance, a banking crisis could jointly cause a growth slowdown and a sudden debt explosion (Reinhart and Rogoff, 2011)). Establishing the presence of a causal link going from debt to growth requires finding an instrumental variable that has a direct effect on debt but no direct (or indirect, except for the one going through debt) effect on economic growth. In this paper, we propose a new instrument for public debt and show that instrumental variable regressions do not provide evidence that public debt causes growth in a sample of OECD countries. Our instrumental variables strategy relies on the fact that, in the presence of foreign currency debt, changes in a country’s exchange rate have a direct and mechanical effect on the debt-to-GDP ratio. We thus collect detailed data on the currency composition of public debt and match them with data on bilateral exchange rates to build a variable that captures valuation effects brought about by exchange rate movements. The first requisite for a good instrument is relevance: the instrument needs to be correlated with the endogenous variable. A battery of weak instrument tests confirm that our instrument is relevant. However, by itself, our valuation effect variable does not satisfy the second requirement for a good instrument (instrument exogeneity). Valuation effects are mechanically correlated with the exchange rate which, in turn, may affect economic growth (Rodrik, 2008). Our instrument is also correlated with the share of foreign currency debt, and the latter may have an effect on economic growth, perhaps through increased macroeconomic volatility (Eichengreen et al., 2005). We address these issues by controlling for debt composition and for the effective exchange rate. We also use a Bayesian approach developed by Kraay (2012) to show that small violations of our exclusion restriction do not affect our results. In order to compare our results with those of the existing literature, we build on the influential paper by Cecchetti et al. (2011). Our paper is also closely related to the historical work of Reinhart and Rogoff, 2009, Reinhart and Rogoff, 2010a and Reinhart and Rogoff, 2010b. Our scope, however, is narrower than that of these papers. In particular, we concentrate on government debt and, unlike Cecchetti et al. (2011) and Reinhart and Rogoff, we do not explore the complex interactions between private and public debt.

We started this paper with a question. Does debt have a causal effect on economic growth? Unfortunately, our answer to this question is: “We don’t know”. We are well-aware that “we don’t know” papers are not as satisfying as papers with a clear result. However, we believe that there is some value in assessing the degree of our ignorance and that our findings are important for the current debate on fiscal policy. There might be many good reasons for fiscal retrenchments, even during recessions. We do not want to enter that debate here. However, we do not find any evidence that, in the medium run, high public debt levels hurt future growth in advanced economies. 22 Therefore, given the state of our current knowledge, we think that the debt-growth link should not be used as an argument in support of fiscal consolidation. We recognize that instruments are never perfect and that their use involves tradeoffs between consistency and efficiency. In describing the strengths and weaknesses of our identification strategy, we have been as transparent as possible and conducted extensive weak instruments and robustness checks. The fact that we do not find a negative effect of debt on growth does not mean that countries can sustain any level of debt. There is clearly a country-specific level of debt which is unsustainable (for instance, when the interest bill becomes greater than GDP) and a debt-to-GDP ratio at which debt overhang, with all its distortionary effects, kicks in (Ghosh et al., 2013). What our results indicate, however, is that there is no evidence that the advanced economies in our sample are, on average, above the country-specific threshold at which debt starts having a negative effect on growth. More generally, the lack of a robust evidence of a negative effect of the debt-to-GDP ratio on economic growth could be due to the fact that we are forced to consider the stock of debt as a ‘black box’. By contrast, the effect of debt may depend on how it has been accumulated, on its composition and on its structure. A higher share of government debt held by non-resident, for instance, could reduce growth because of a transfer of resources to non-resident, a lower tax base and higher interest rates (for evidence on interest rate effects, see Dell’Erba et al., 2013). Unfortunately, data issues prevent us from conducting a detailed analysis of the effect of debt structure on growth (Panizza and Presbitero, 2013). There is a channel through which high levels of public debt can have a negative effect on growth that may not be captured in our empirical exercise.23 In the presence of multiple equilibria, a solvent government with a high level of debt may decide to put in place restrictive fiscal policies to reduce the probability that a sudden change in investors’ sentiments would push the country towards the bad equilibrium.24 These policies, in turn, may reduce growth (Perotti, 2012 and Jaramillo and Cottarelli, 2013), especially if implemented during a recession.25 In this case, it would be true that debt reduces growth, but only because high levels of debt lead to contractionary policies. While such an interpretation would justify long-term policies aimed at reducing debt levels, it also implies that countries should not implement restrictive policies in the middle of a crisis. Of course, policymakers under pressure from market participants might not have an alternative.26 This is why we need prudent fiscal policies and lenders of last resort that can rule out multiple equilibria. Summing up, our reading of the current empirical evidence linking public debt and economic growth in advanced economies can be summarized as follows: (i) there are many papers that show that public debt is negatively correlated with economic growth in advanced economies; (ii) there is no paper that makes a convincing case for a causal link going from public debt to economic growth in advanced economies; and (iii) our paper suggests that such a causal link may not exist (more precisely, our paper does not reject the null hypothesis that debt has no impact on growth). The case that debt has causal effect on growth in advanced economies still needs to be made.