NBER WORKING PAPER SERIES

GROWTH IN A TIME OF DEBT

Carmen M. ReinhartKenneth S. Rogoff

Working Paper 15639http://www.nber.org/papers/w15639

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138January 2010

This paper was prepared for the American Economic Review Papers and Proceedings. The authorswould like to thank Olivier Jeanne and Vincent R. Reinhart for helpful comments and the NationalScience Foundation Grant No. 0849224 for financial support. The views expressed herein are thoseof the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies officialNBER publications.

2010 by Carmen M. Reinhart and Kenneth S. Rogoff. All rights reserved. Short sections of text,not to exceed two paragraphs, may be quoted without explicit permission provided that full credit,including notice, is given to the source.

Growth in a Time of DebtCarmen M. Reinhart and Kenneth S. RogoffNBER Working Paper No. 15639January 2010, Revised January 2010JEL No. E2,E3,E6,F3,F4,N10

ABSTRACT

We study economic growth and inflation at different levels of government and external debt. Ouranalysis is based on new data on forty-four countries spanning about two hundred years. The datasetincorporates over 3,700 annual observations covering a wide range of political systems, institutions,exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationshipbetween government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth fallsconsiderably more. We find that the threshold for public debt is similar in advanced and emergingeconomies. Second, emerging markets face lower thresholds for external debt (public and private)whichis usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annualgrowth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third,there is no apparent contemporaneous link between inflation and public debt levels for the advancedcountries as a group (some countries, such as the United States, have experienced higher inflationwhen debt/GDP is high). The story is entirely different for emerging markets, where inflation risessharply as debt increases.

Carmen M. ReinhartUniversity of MarylandDepartment of Economics4118D Tydings HallCollege Park, MD 20742and NBERcreinhar@umd.edu

Kenneth S. RogoffThomas D Cabot Professor of Public PolicyEconomics DepartmentHarvard UniversityLittauer Center 216Cambridge, MA 02138-3001and NBERkrogoff@harvard.edu

2

I. Introduction

In this paper, we exploit a new multi-country historical data set on central government debt as

well as more recent data on external (public and private) debt to search for a systematic relationship

between debt levels, growth and inflation. 1 Our main result is that whereas the link between growth and

debt seems relatively weak at normal debt levels, median growth rates for countries with public debt

over 90 percent of GDP are roughly one percent lower than otherwise; 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. Emerging markets do face a much more

binding threshold for total gross external debt (public and private)which is almost exclusively

denominated in a foreign currency. We find no systematic relationship between high debt levels and

inflation for advanced economies as a group (albeit with individual country exceptions including the

United States). By contrast, inflation rates are markedly higher in emerging market countries with higher

public debt levels.

Our topic would seem to be a timely one. Government debt has been soaring in the wake

of the recent global financial maelstrom, especially in the epi-center countries. This might have

been expected. Using a benchmark of 14 earlier severe post-World-War II financial crises, we

demonstrated (one year ago) that central government debt rises, on average, by about 86 percent

within three years after the crisis.2

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 macroeconomic adjustment, particularly in employment and housing prices.

3

Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is

the long run macroeconomic impact or higher levels of government debt, especially against the

backdrop of graying populations and rising social insurance costs?

Our approach here is decidedly empirical, taking advantage of a broad new historical data

set on public debt (in particular, central government debt), first presented in Reinhart and Rogoff

(2008, 2009b). Prior to this data set, it was exceedingly difficult to get more than two or three

decades of public debt data even for many rich countries, and virtually impossible for most

emerging markets. 3 Our results incorporate data on forty-four countries spanning about two

hundred years. Taken together, the data incorporate over 3,700 annual observations covering a

wide range of political systems, institutions, exchange rate and monetary arrangements, and

historic circumstances.

We also employ more recent data on external debt, including both debt owed by

governments and by private entities. For emerging markets, we find that there exists a

significantly more severe threshold for total gross external debt (public and private) -- which

tends to be almost exclusively denominated in a foreign currency -- than for total public debt (the

domestically-issued component of which is largely denominated in home currency.) When gross

external debt reaches 60 percent of GDP, annual growth declines by about two percent; for levels

of external debt in excess of 90 percent of GDP, growth rates are roughly cut in half. We are

not in a position to calculate separate total external debt thresholds (as opposed to public debt

thresholds) for advanced countries. The available time series is too recent, beginning only in

early 2000s as a byproduct of the International Monetary Fund efforts and creation of the Special

3 For other related efforts on developing cross country public debt data bases, including Reinhart, Rogoff and Savasatano (2003) and Jeanne and Guscina (2006), see the discussion in Reinhart and Rogoff (2009b).

4

Data Dissemination Standard (SDDS). We do note, however, that external debt levels in

advanced countries now average about 200 percent of GDP, with external debt levels being

particularly high across Europe.

The focus of this paper is on the longer term macroeconomic implications of much higher

public and external debt. The final section, however, discusses the role of private domestic debt

examining the historical experience of the United States. We highlight episodes of private sector

deleveraging of debts, normal after a systemic financial crisis; not surprisingly, such episodes are

associated with very slow growth and deflation.

II. The Global 2007-2009 Buildup in Public Debt

Figure 1 illustrates the increase in (inflation adjusted) public debt that has occurred since

2007. For the five countries with systemic financial crises (Iceland, Ireland, Spain, the United

Kingdom, and the United States), average debt levels are up by about 75 percent, well on track to

reach or surpass the three year 86 percent benchmark that Reinhart and Rogoff (2009a,b) find for

earlier deep post-war financial crises. Even in countries that have not experienced a major

financial crisis, debt rose an average of about 20 percent in real terms between 2007 and 2009.4

This general rise in public indebtedness stands in stark contrast to the 2003-2006 period of public

deleveraging in many countries and owes to direct bail-out costs in some countries, the adoption

of stimulus packages to deal with the global recession in many countries, and marked declines in

government revenues that have hit advanced and emerging market economies alike.

4 Our focus on gross central government debt owes to the fact that time series of broader measures government are not available for many countries. Of course, the true run-up in debt is significantly larger than stated here, at least on a present value actuarial basis, due to the extensive government guarantees that have been conferred on the financial sector in the crisis countries and elsewhere.

5

Figure 1. Cumulative Increase in Real Public Debt Since 2007, Selected Co