Brussels, 19/02/2014 (Agence Europe) - There is not a threshold beyond which public debt undermines a country's medium-term growth prospects. This is the conclusion reached by three International Monetary Fund economists, Andrea Pescatori, Damiano Sandri and John Simon, in research entitled: “Debt and Growth - is there a magic threshold?”
The research is not officially recognised by the IMF and is intended as a contribution to the debate among politicians and economists about how debt interacts with growth. Research in 2010 by two economists, Carmen Reinhart and Kenneth Rogoff, found that public debt of over 90% of a country's GDP acted as a brake on growth. The European Commission has backed the study on several occasions, but its outcome has been challenged by the three IMF economists, who found calculation errors in the 2010 study.
The IMF economists agree with the 2010 study on debt trajectory: “We also find evidence that the debt trajectory can be just as important, and possibly more important, than the level of debt in understanding future growth prospects. Indeed, countries with high but declining levels of debt have historically grown just as fast as their peers. We also find, however, that high levels of debt are weakly associated with higher output volatility. This suggests that high levels of debt may still be associated with market pressure or fiscal and monetary policy actions that, even if they do not have particularly large negative effects on medium-term growth, destabilize it. As with previous empirical studies, however, caution should be used in the interpretation of our empirical results. While our methodology may attenuate problems of reverse causality from growth to debt, our methodology is still unable to formally establish a firm causality”. Earlier this month, in a speech to the European Committee of the Regions, Euro Commissioner Olli Rehn pointed out that, over the last decade, some countries had found themselves “with high levels of public and private debt, making them unable to gather money on the market”.
The three IMF economists warn: “As in previous empirical studies, our analysis is still subject to potential endogeneity concerns that should caution against drawing strong policy implications”. (EL/transl.fl)