Our public debt and growth paper on VOX

Countries with high public debt tend to grow slowly – a correlation often used to justify austerity. This column presents new evidence challenging this view. The authors point out that correlation does not imply causality – it may be that slow growth causes high debt. They argue that policymakers should be wary – the case for cutting debt to boost growth still needs to be made. The rest is here

Is public debt bad for growth?

Not really.

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 instrument debt with a variable that captures valuation effects brought about by the interaction between foreign currency debt and exchange rate volatility. 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.

The paper is here


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