Do higher public debt levels reduce economic growth?

Abstract

Abstract While the effect of higher public debt levels on economic growth has received much attention, the literature partly points to contradictory results. This paper applies meta‐regression methods to 816 estimates from 47 primary studies. The unweighted mean of the reported results suggests that a 10 percentage points increase in public‐debt‐to‐GDP is associated with a decline in annual growth rates by 0.14 percentage points, with a 95% confidence interval from 0.09 to 0.19 percentage points. However, we cannot reject a zero effect after correcting for publication bias. Furthermore, the meta‐regression analysis shows that tackling endogeneity between public debt and growth leads to less adverse effects of public debt. In testing for nonlinear effects, our results do not point to a uniform public‐debt‐to‐GDP threshold beyond which growth slows. Threshold estimates are sensitive to data and econometric choices. These findings imply a lack of evidence of a consistently negative growth effect of higher public‐debt‐to‐GDP. The main policy implication is that there should be caution with regard to “one‐size‐fits‐all” fiscal policy prescriptions in dealing with higher public debt levels.