The Impact of Government Debt on Growth. An Empirical Investigation for the Euro Area

This paper investigates the average impact of government debt on per capita gdp growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a nonlinear impact of debt on growth with a turning point –beyond which the government debt-to-gdp ratio has a deleterious impact on long-term growth– at about 90-100% of gdp. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of gdp, which calls for even more prudent indebtedness policies. From a policy perspective, the results provide additional arguments for debt reduction to support longer-term economic growth prospects.