Public Debt and Growth in U.S. States

The relationship between public debt and economic growth is a highly contentious issue. This paper examines the relationship between public debt and medium-term economic growth by applying semi?parametric methods to a panel of U.S. states. Partially linear models demonstrate that the relationship between debt and growth is non?linear. Although some borrowing may be beneficial, higher levels of debt exert a negative impact on growth. The principal implication of these results is that public debt may be acting as a drag on growth for U.S. States. The presence of nonlinearities and a negative relationship between debt and growth at a sub-national level suggests that this relationship may also operate at a national level.