AN EMPIRICAL INVESTIGATION OF THE IMPACT CENTRAL GOVERNMENT DEBT HAS ON ECONOMIC GROWTH ON THE G8 COUNTRIES WITH SIGNIFICANCE ON DEBT THRESHOLDS

Abstract

Abstract This paper analyses firstly the significance of central government debt in an ad hoc econometric model and secondly tests the robustness of Reinhart and Rogoff stylized facts on debt thresholds. Our analysis is based on data for the G8 counties spanning 17 years, from 1995-2012. We review significant literature on debt and growth to evaluate the main channels through which debt affects growth and use this to compile our ad hoc model. Our main findings of the econometric analysis is that in our first model we find central government debt to have a significant, weak negative relationship with economic growth. We also find the same results as Reinhart and Rogoff in our threshold analysis. The relationship between economic growth and central government debt below 90% debt to GDP levels is not significant. However, we find a strong negative relationship between the two when debt levels are above the 90% threshold.