The impact of total debt levels and debt shocks on growth

Abstract

Although the recent global financial crisis has produced a vast amount of research on the impact of public debt on economic growth and also increasingly on the role of private credit, the total levels of indebtedness of an economy have largely been ignored. This paper studies the impact of the total level of debt-to-GDP and increases in that level on economic growth for 26 developed countries between 1961 and 2012 in the short, medium and longer term. Can we predict the future level of growth, simply by looking at the total level of debt, or increases in that debt level? We find that there is a negative correlation between high levels of debt and short term economic growth, but that this effect tapers off when looking at GDP growth over the medium to long term. Similarly, we find that rapid debt accumulation is negatively related to economic growth over the short term, that this effect is less pronounced over the medium term and is non-existent over the long term.