reinhart and rogoff

7/30/2019 Reinhart and Rogoff

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American Economic Review: Papers & Proceedings 100 (May 2010): 573578

http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573

In this paper, we exploit a new multi-countryhistorical dataset on public (government) debt tosearch or a systemic relationship between highpublic debt levels, growth and infation.1 Ourmain result is that whereas the link betweengrowth and debt seems relatively weak at nor-mal debt levels, median growth rates or coun-tries with public debt over roughly 90 percento GDP are about one percent lower than other-

wise; average (mean) growth rates are severalpercent lower. Surprisingly, the relationshipbetween public debt and growth is remarkablysimilar across emerging markets and advancedeconomies. This is not the case or infation. Wend no systematic relationship between highdebt levels and infation or advanced econo-mies as a group (albeit with individual countryexceptions including the United States). By con-trast, in emerging market countries, high publicdebt levels coincide with higher infation.

Our topic would seem to be a timely one.Public debt has been soaring in the wake o therecent global nancial maelstrom, especially inthe epicenter countries. This should not be sur-prising, given the experience o earlier severenancial crises.2 Outsized decits and epic bankbailouts may be useul in ghting a downturn,but what is the long-run macroeconomic impact,

1 In this paper public debt reers to gross centralgovernment debt. Domestic public debt is governmentdebt issued under domestic legal jurisdiction. Public debtdoes not include debts carrying a government guarantee.Total gross external debt includes the external debts oallbranches o government as well as private debt that is issuedby domestic private entities under a oreign jurisdiction.

2 Reinhart and Rogo(2009a, b) demonstrate that theatermath o a deep nancial crisis typically involves aprotracted period o macroeconomic adjustment, particu-

larly in employment and housing prices. On average, publicdebt rose by more than 80 percent within three years atera crisis.

GrowthinaTimeofDebt

By C M. R K S. R*

especially against the backdrop o graying pop-ulations and rising social insurance costs? Aresharply elevated public debts ultimately a man-ageable policy challenge?

Our approach here is decidedly empirical,taking advantage o a broad new historicaldataset on public debt (in particular, centralgovernment debt) rst presented in Carmen M.Reinhart and Kenneth S. Rogo(2008, 2009b).

Prior to this dataset, it was exceedingly dicultto get more than two or three decades o pub-lic debt data even or many rich countries, andvirtually impossible or most emerging markets.Our results incorporate data on 44 countriesspanning about 200 years. Taken together, thedata incorporate over 3,700 annual observationscovering a wide range o political systems, insti-tutions, exchange rate and monetary arrange-ments, and historic circumstances.

We also employ more recent data on externaldebt, including debt owed both by governmentsand by private entities. For emerging markets,we nd that there exists a signicantly moresevere threshold or total gross external debt(public and private)which is almost exclu-sively denominated in a oreign currencythanor total public debt (the domestically issuedcomponent o which is largely denominatedin home currency). When gross external debtreaches 60 percent o GDP, annual growthdeclines by about two percent; or levels oexternal debt in excess o 90 percent o GDP,

growth rates are roughly cut in hal. We are notin a position to calculate separate total exter-nal debt thresholds (as opposed to public debtthresholds) or advanced countries. The avail-able time-series is too recent, beginning only in2000. We do note, however, that external debtlevels in advanced countries now average nearly200 percent o GDP, with external debt levelsbeing particularly high across Europe.

The ocus o this paper is on the longer termmacroeconomic implications o much higher

public and external debt. The nal section, how-ever, summarizes the historical experience othe United States in dealing with private sector

* Reinhart: Department o Economics, 4115 TydingsHall, University o Maryland, College Park, MD 20742(e-mail: [email protected]); Rogo: Economics Depart-

ment, 216 Littauer Center, Harvard University, CambridgeMA 021383001 (e-mail: [email protected]). Theauthors would like to thank Olivier Jeanne and Vincent R.Reinhart or helpul comments.


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MAY 2010574 AEA PAPERS AND PROCEEDINGS

deleveraging o debts, normal ater a nancialcrisis. Not surprisingly, such episodes are asso-ciated with very slow growth and defation.

I. The 20072009 Global Buildup in Public Debt

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

2007. For the ve countries with systemic nan-cial crises (Iceland, Ireland, Spain, the UnitedKingdom, and the United States), average debtlevels are up by about 75 percent, well on track toreach or surpass the three year 86 percent bench-mark that Reinhart and Rogo (2009a,b), ndor earlier deep postwar nancial crises. Even incountries that did not experience a major nan-cial crisis, debt rose by an average o about 20percent in real terms between 2007 and 2009.3

3 Our ocus on gross central government debt owes tothe act that time series o broader measures o government

This general rise in public indebtedness stands instark contrast to the 20032006 period o pub-lic deleveraging in many countries and owes todirect bailout costs in some countries, the adop-tion o stimulus packages to deal with the globalrecession in many countries, and marked declinesin government revenues that have hit advancedand emerging market economies alike.

II. Debt,Growth,andInfation

The nonlinear eect o debt on growth isreminiscent o debt intolerance (Reinhart,Rogo, and Miguel A. Savastano 2003) andpresumably is related to a nonlinear responseo market interest rates as countries reach debt

tolerance limits. Sharply rising interest rates,in turn, orce painul scal adjustment in theorm o tax hikes and spending cuts, or, insome cases, outright deault. As or infation,an obvious connection stems rom the act thatunanticipated high infation can reduce thereal cost o servicing the debt. O course, theecacy o the infation channel is quite sen-sitive to the maturity structure o the debt. Inprinciple, the manner in which debt builds upcan be important. For example, war debts arearguably less problematic or uture growthand infation than large debts that are accu-mulated in peacetime. Postwar growth tendsto be high as wartime allocation o manpowerand resources unnels to the civilian economy.Moreover, high wartime government spending,typically the cause o the debt buildup, comesto a natural close as peace returns. In contrast,a peacetime debt explosion oten refects unsta-ble political economy dynamics that can persistor very long periods.

Here we will not attempt to determine the gen-

esis o debt buildups but instead simply look attheir connection to average and median growthand infation outcomes. This may lead us, i any-thing, to understate the adverse growth implica-tions o debt burdens arising out o the currentcrisis, which was clearly a peacetime event.

debt are not available or many countries. O course, thetrue run-up in debt is signicantly larger than stated here,at least on a present value actuarial basis, due to the exten-

sive government guarantees that have been conerred on thenancial sector in the crisis countries and elsewhere, whereor example deposit guarantees were raised in 2008.

69

44

72

42

84

62

22

9

21

29

25

47

119

47

62

4

44

182

46

32

41

49

Debt/GDP

2009100 150 200 250

Iceland

Ireland

UK

Spain

US

Crisis country average

Norway

Australia

China

Thailand

Mexico

Malaysia

Greece

Canada

Austria

Chile

Germany

Japan

Brazil

Korea

India

Average for others

2007 = 100

175.1

(increase of 75%)

120 (increase of 20%)

Figure 1. Cumulative Increase in Real Public Debt

Since 2007, Selected Countries

Note: Unless otherwise noted these gures are or centralgovernment debt defated by consumer prices.

Sources: Prices and nominal GDP rom InternationalMonetary Fund, World Economic Outlook. For a completelisting o sources or government debt, see Reinhart and

Rogo(2009b).


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VOL. 100 NO. 2 575GRO IN A IME Of DEB

A.EvidenceromAdvancedCountries

Figure 2 presents a summary o infation andGDP growth across varying levels o debt or 20advanced countries over the period 19462009.This group includes Australia, Austria, Belgium,Canada, Denmark, Finland, France, Germany,Greece, Ireland, Italy, Japan, Netherlands, NewZealand, Norway, Portugal, Spain, Sweden, theUnited Kingdom, and the United States. Theannual observations are grouped into our cat-egories, according to the ratio o debt to GDPduring that particular year as ollows: years when

debt to GDP levels were below 30 percent (lowdebt); years where debt/GDP was 30 to 60 per-cent (medium debt); 60 to 90 percent (high); and

above 90 percent (very high). The bars in Figure2 show average and median GDP growth oreach o the our debt categories. Note that o the1,186 annual observations, there are a signicantnumber in each category, including 96 above 90percent. (Recent observations in that top bracketcome rom Belgium, Greece, Italy, and Japan.)From the gure, it is evident that there is noobvious link between debt and growth until pub-lic debt reaches a threshold o 90 percent. Theobservations with debt to GDP over 90 percenthave median growth roughly 1 percent lower thanthe lower debt burden groups and mean levels ogrowth almost 4 percent lower. (Using laggeddebt does not dramatically change the picture.)The line in Figure 2 plots the median infation or

the dierent debt groupingswhich makes plainthat there is no apparent pattern osimultaneousrising infation and debt.

Table 1 provides detail on the growth experi-ence or individual countries, but over a muchlonger period, typically one to two centuries.Interestingly, introducing the longer time-seriesyields remarkably similar conclusions. Over thepast two centuries, debt in excess o 90 percenthas typically been associated with mean growtho 1.7 percent versus 3.7 percent when debt islow (under 30 percent o GDP), and comparedwith growth rates o over 3 percent or the twomiddle categories (debt between 30 and 90 per-cent o GDP). O course, there is considerablevariation across the countries, with some coun-tries such as Australia and New Zealand experi-encing no growth deterioration at very high debtlevels. It is noteworthy, however, that those high-growth high-debt observations are clustered inthe years ollowing World War II.

B.EvidenceromEmergingMarketCountries

We next perorm the same exercise or 24emerging market economies or the periods19462009 and 19002009, using comparablecentral government debt data to those we usedor the advanced economies.4 Perhaps surpris-ingly, the results illustrated in Figure 2 andTable 1 or advanced economies are repeatedor emerging market economies. The emerging

4

While we have pre-1900 infation, real GDP, and publicdebt data or many emerging markets, nominal GDP data isharder to nd.

1.0

0.0

1.0

2.0

3.0

4.0

5.0

Average Median Average Median Average Median Average Median

GDP

growth

2

2.5

3

3.5

4

4.5

5

5.5

6

Inflation

Debt/GDP

below 30%

Debt/GDP

30 to 60%

Debt/GDP

60 to 90%

Debt/GDP

above 90%

Inflation(line, right axis)

GDP growth (bars, left axis)

Figure 2. Government Debt, Growth, and Inflation:

Selected Advanced Economies, 19462009

Notes: Central government debt includes domestic andexternal public debts. The 20 advanced economies includedare Australia, Austria, Belgium, Canada, Denmark,Finland, France, Germany, Greece, Ireland, Italy, Japan,Netherlands, New Zealand, Norway, Portugal, Spain,Sweden, the United Kingdom, and the United States. The

number o observations or the our debt groups are: 443or debt/GDP below 30 percent; 442 or debt/GDP 30 to 60percent; 199 observations or debt/GDP 60 to 90 percent;and 96 or debt/GDP above 90 percent. There are 1,180observations.Sources: International Monetary Fund, orldEconomicOutlook, OECD, World Bank, Global Developmentfinance, and Reinhart and Rogo (2009b) and sourcescited therein.


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market equivalents oFigure 2 and Table 1 arenot reproduced here (to economize on space),

but the interested reader is reerred to theNBER working paper version o this paper.For 19002009, or example, median and aver-age GDP growth hovers around 44.5 percentor levels o debt below 90 percent o GDP, butmedian growth alls markedly to 2.9 percentor high debt (above 90 percent); the decline iseven greater or the average growth rate, whichalls to 1 percent. With much aster populationgrowth than the advanced economies, the impli-cations or per capita GDP growth are in line (or

worse) with those shown or advanced econo-mies. The similarities with advanced economiesend there, as higher debt levels are associated

with signicantly higher levels o infation inemerging markets. Median infation more than

doubles (rom less than seven percent to 16 per-cent) as debt rises rom the low (0 to 30 percent)range to above 90 percent. Fiscal dominance is aplausible interpretation o this pattern.

Because emerging markets oten depend somuch on external borrowing, it is interesting tolook separately at thresholds or external debt(public and private). In Figure 3, we highlightthe connection between gross external debt asreported by the World Bank and growth andinfation. As one can see, the growth thresholds

or external debt are considerably lower than thethresholds or total public debt. Growth dete-riorates markedly at external debt levels over

Table 1Real GDP Growth as the Level of Government Debt Varies:

Selected Advanced Economies, 17902009

(annual percent change)

Central (ederal) government debt/GDP

Country Period Below 30percent 30 to 60percent 60 to 90percent 90 percentand above

Australia 19022009 3.1 4.1 2.3 4.6Austria 18802009 4.3 3.0 2.3 n.a.Belgium 18352009 3.0 2.6 2.1 3.3Canada 19252009 2.0 4.5 3.0 2.2Denmark 18802009 3.1 1.7 2.4 n.a.Finland 19132009 3.2 3.0 4.3 1.9France 18802009 4.9 2.7 2.8 2.3Germany 18802009 3.6 0.9 n.a. n.a.Greece 18842009 4.0 0.3 4.8 2.5Ireland 19492009 4.4 4.5 4.0 2.4Italy 18802009 5.4 4.9 1.9 0.7Japan 18852009 4.9 3.7 3.9 0.7

Netherlands 18802009 4.0 2.8 2.4 2.0New Zealand 19322009 2.5 2.9 3.9 3.6Norway 18802009 2.9 4.4 n.a. n.a.Portugal 18512009 4.8 2.5 1.4 n.a.Spain 18502009 1.6 3.3 1.3 2.2Sweden 18802009 2.9 2.9 2.7 n.a.United Kingdom 18302009 2.5 2.2 2.1 1.8United States 17902009 4.0 3.4 3.3 1.8

Average 3.7 3.0 3.4 1.7Median 3.9 3.1 2.8 1.9

Observations = 2,317 866 654 445 352

Notes: An n.a. denotes no observations were recorded or that particular debt range. Thereare missing observations, most notably during World War I and II years; urther details areprovided in the data appendices to Reinhart and Rogo (2009b) and are available rom theauthors. Minimum and maximum values or each debt range are shown inbolded i talics.Sources: There are many sources; among the more prominent are: International MonetaryFund, orld Economic Outlook, OECD, World Bank, Global Development finance. Extensiveother sources are cited in Reinhart and Rogo(2009).


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VOL. 100 NO. 2 577 GRO IN A IME Of DEB

60 percent, and urther still when external debtlevels exceed 90 percent, which record outrightdeclines. In light o this, it is more understand-able that over one hal o all deaults on externaldebt in emerging markets since 1970 occurred at

levels o debt that would have met the Maastrichtcriteria o 60 percent. Infation becomes signi-cantly higher only or the group o observationswith external debt over 90 percent.

III. PrivateSectorDebt:AnIllustration

Our main ocus has been on central govern-ment debt and, to a lesser degree, external publicand private debt, since reliable data on privatedomestic debts are much scarcer across countries

and time. We have argued here and elsewherethat a key legacy o a deep nancial crisis israpidly expanding public debt. Furthermore, we

have shown that public levels o debt/GDP thatpush the 90 percent threshold are associated withlower median and average growth.5 These obser-vations, however, present only a partial picture othe post-nancial crisis landscape. Private debt,in contrast, tends to shrink sharply in the ater-math o a nancial crisis. Just as a rapid expan-sion in private credit uels the boom phase o thecycle, so does serious deleveraging exacerbate thepost-crisis downturn. This pattern is illustrated inFigure 4, which shows the ratio o private debt toGDP or the United States or 19162009. Periodso sharp deleveraging have ollowed periods olower growth and coincide with higher unem-ployment. In varying degrees, the private sector(households and rms) in many other countries

(notably both advanced and emerging Europe)are also unwinding the debt built up during theboom year. Thus, private deleveraging may beanother legacy o the nancial crisis that maydampen growth in the medium term.

IV. ConcludingRemarks

The sharp run-up in public sector debt willlikely prove one o the most enduring lega-cies o the 20072009 nancial crises in theUnited States and elsewhere. We examine theexperience o 44 countries spanning up to twocenturies o data on central government debt,infation and growth. Our main nding is thatacross both advanced countries and emergingmarkets, high debt/GDP levels (90 percent andabove) are associated with notably lower growthoutcomes. Much lower levels o external debt/GDP (60 percent) are associated with adverseoutcomes or emerging market growth. Seldomdo countries grow their way out o debts. Thenonlinear response o growth to debt as debt

grows towards historical boundaries is remi-niscent o the debt intolerance phenomenondeveloped in Reinhart, Rogo, and Savastano(2003). As countries hit debt tolerance ceilings,market interest rates can begin to rise quite sud-denly, orcing painul adjustment.

O course, there are other vulnerabilitiesassociated with debt buildups, particularly igovernments try to mitigate servicing costs by

5

It is important to note that post-crises increases in pub-lic debt do not necessarily push economies into the vulner-able 90+ debt/GDP range.

1.5

0.5

0.5

1.5

2.5

3.5

4.5

5.5


GDP

growth

10

11

12

13

14

15

16

17

Debt/GDP

below 30%

Debt/GDP

30 to 60% Debt/GDP60 to 90% Debt/GDPabove 90%

Inflation(line, right axis)


Inflation

Figure 3. External Debt, Growth, and Inflation:

Selected Emerging Markets, 1970-2009

Notes: The 20 emerging market countries included areArgentina, Bolivia, Brazil, Chile, China, Colombia, Egypt,India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Peru,Philippines, South Arica, Thailand, Turkey, Uruguay, andVenezuela. The number o observations or the our debtgroups are: 252 or debt/GDP below 30 percent; 309 ordebt/GDP 30 to 60 percent; 120 observations or debt/GDP60 to 90 percent; and 74 or debt/GDP above 90 percent.There is a total o 755 annual observations.Sources: International Monetary Fund, orldEconomicOutlook, World Bank, GlobalDevelopmentfinance, andReinhart and Rogo(2009b) and sources cited therein.


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shortening the maturing structure o debt. AsReinhart and Rogo (2009b) emphasize andnumerous models suggest, countries that chooseto rely excessively on short-term borrowing tound growing debt levels are particularly vul-nerable to crises in condence that can provokevery sudden and unexpected nancial crises.At the very minimum, this would suggest thattraditional debt management issues should be atthe oreront o public policy concerns.

REFERENCES

Reinhart, Carmen M., and Kenneth S. Rogo.2008. The Forgotten History o Domestic

Debt. National Bureau o Economic ResearchWorking Paper 13946.

Reinhart, Carmen M., and Kenneth S. Rogo.

2009a. The Atermath o Financial Cri-ses. American Economic Review, 99(2):46672.

Reinhart, Carmen M., and Kenneth S. Rogo.

2009b. his ime Is Dierent: Eight Centurieso financial folly. Princeton, NJ: PrincetonUniversity Press.

Reinhart, Carmen M., Kenneth S. Rogo, and

Miguel A. Savastano. 2003. Debt Intoler-ance.Brookings Papers on Economic Activ-

ity (1), ed. William C. Brainard and George L.Perry, 162.

19161939 19462009

Years with debt/GDP declines 9.8 7.2All other years 6.7 5.5

unemployment rateMedian

20

70

120

170

220

270

320

1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Historical statistics

of the United States

Flow of funds

Percent

Figure 4. United States: Private Debt Outstanding, 19162009

(end-of-period stock of debt as a percent of GDP)

Note: Data or 2009 is end-o-June.

Sources:istorical Stat istics o the United States, Flow o Funds, Board o Governors o theFederal Reserve, International Monetary Fund, orld Economic Outlook, OECD, World Bank,Global Development finance, and Reinhart and Rogo(2009b) and sources cited therein.


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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-WarII 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 ofallbranches 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.


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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).


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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 arenot 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.


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5

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

69

44

72

42

84

62

22

9

21

2925

47

119

47

62

4

44

182

46

32

41

49

Debt/GDP

2009100 150 200 250

Iceland

Ireland

UK

Spain

US

Crisis country average

Norway

Australia

China

Thailand

Mexico

Malaysia

Greece

Canada

Austria

Chile

Germany

Japan

Brazil

Korea

IndiaAverage for others

2007 = 100

175.1

(increase of 75%)

120 (increase of 20%)

Notes: Unless otherwise noted these figures are for central government debt deflated by consumer prices.

Sources: Prices and nominal GDP from International Monetary Fund, World Economic Outlook. For a complete

listing of sources for government debt, see Reinhart and Rogoff (2009b).


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6

III. Debt, Growth, and Inflation

The simplest connection between public debt and growth is suggested by Robert Barro

(1979). Assuming taxes ultimately need to be raised to achieve debt sustainability, the

distortionary impact imply is likely to lower potential output. Of course, governments can also

tighten by reducing spending, which can also be contractionary. As for inflation, an obvious

connection stems from the fact that unanticipated high inflation can reduce the real cost of

servicing the debt. Of course, the efficacy of the inflation channel is quite sensitive to the

maturity structure of the debt. Whereas long-term nominal government debt is extremely

vulnerable to inflation, short term debt is far less so. Any government that attempts to inflate

away the real value of short term debt will soon find itself paying much higher interest rates.

In principle, the manner in which debt builds up can be important. For example, war

debts are arguably less problematic for future growth and inflation than large debts that are

accumulated in peace time. Postwar growth tends to be high as war-time allocation of manpower

and resources funnels to the civilian economy. Moreover, high war-time government spending,

typically the cause of the debt buildup, comes to a natural close as peace returns. In contrast, a

peacetime debt explosion often reflects unstable underlying political economy dynamics that can

persist for very long periods.

Here we will not attempt to discriminate the genesis of debt buildups, and instead simply

look at their connection to average and median growth and inflation outcomes. This may lead

us, if anything, to understate the adverse growth implications of debt burdens arising out of the

current crisis, which was clearly a peace time event.


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7

A. Evidence from Advanced Countries

Figure 2 presents a summary of inflation and GDP growth across varying levels of debt

for twenty advanced countries over the period 1946-2009. This group includes Australia,

Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan,

Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the

United States. The annual observations are grouped into four categories, according to the ratio

of debt-to GDP during that particular year as follows: years when debt to GDP levels were

below 30 percent (low debt); years where debt/GDP was 30 to 60 percent (medium debt); 60 to

90 percent (high); and above 90 percent (very high). 5 The bars in Figure 2 show average and

median GDP growth for each of the four debt categories. Note that of the 1186 annual

observations, there are a significant number in each category, including 96 above 90 percent.

(Recent observations in that top bracket come from Belgium, Greece, Italy, and Japan.) From

the figure, it is evident that there is no obvious link between debt and growth until public debt

reaches a threshold of 90 percent. The observations with debt to GDP over 90 percent have

median growth roughly 1 percent lower than the lower debt burden groups and mean levels of

growth almost 4 percent lower. (Using lagged debt should not dramatically change the picture.)

The line in Figure 2 plots the median inflation for the different debt groupingswhich makes

plain that there is no apparent pattern ofsimultaneous rising inflation and debt.6

5 The four buckets encompassing low, medium-low, medium-high, and high debt levels are based on our

interpretation of much of the literature and policy discussion on what is considered low, high etc debt levels. It

parallels the World Bank country groupings according to four income groups. Sensitivity analysis involving a

different set of debt cutoffs merits exploration as do country-specific debt thresholds along the broad lines discussedin Reinhart, Rogoff, and Savastano (2003).6 See Appendix Tables 1 and 2 for 1946-2009 summary statistics on growth and inflation, respectively, for advanced

economies and emerging markets.


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8

Figure 2. Government Debt, Growth, and Inflation: Selected Advanced Economies, 1946-2009

-1.0

0.0

1.0

2.0

3.0

4.0

5.0


GDPgrowth

2

2.5

3

3.5

4

4.5

5

5.5

6

Inflation

Debt/GDP

below 30%

Debt/GDP

30 to 60%

Debt/GDP

60 to 90%

Debt/GDP

above 90%

Inflation

(line, right axis)


Notes: Central government debt includes domestic and external public debts. The 20 advanced economies included

are Australia. Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan,

Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States. The

number of observations for the four debt groups are: 443 for debt/GDP below 30%; 442 for debt/GDP 30 to 60%;

199 observations for debt/GDP 60 to 90%; and 96 for debt/GDP above 90%. There are 1,180 observations.

Sources: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development

Finance, and Reinhart and Rogoff (2009b) and sources cited therein.


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9

There are exceptions to this inflation result, as Figure 3 makes plain for the Unites States, where

debt levels over 90% of GDP are linked to significantly elevated inflation. Figure 3 spans 1791-

2009, but the pattern for the post-war period taken alone is very similar.


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10

Figure 3. United States Central (Federal) Government Debt, Growth, and Inflation:1790-2009

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0


GDPgrowt

0

1

2

3

4

5

6

7

Inflatio

Debt/GDP

below 30%

Debt/GDP

30 to 60%Debt/GDP

60 to 90%

Debt/GDP

above 90%

Inflation

(line, right axis)

GDP rowth bars, left axis

otes: Central government debt is gross debt. The number of observations for the four debt groups are:

129 for debt/GDP below 30%; 59 for debt/GDP 30 to 60%; 23 observations for debt/GDP 60 to 90%; and5 for debt/GDP above 90%, for a total of 216 observations.Sources: International Monetary Fund, World Economic Outlook, OECD, World Bank, Global

Development Finance, ), US Treasury Direct, Reinhart and Rogoff (2009) and sources cited therein.


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11

Table 1 provides detail on the growth experience for individual countries, but over a

much longer period, typically one to two centuries. Interestingly, introducing the longer time

series yields remarkably similar conclusions. Over the past two centuries, debt in excess of 90

percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when

debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the

two middle categories (debt between 30 and 90 percent of GDP). Of course, there is

considerable variation across the countries, with some countries such as Australia and New

Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy,

however, that those high-growth high-debt observations are clustered in the years following

World War II.


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12

Table 1. Real GDP Growth as the Level of Government Debt Varies:Selected Advanced Economies, 1790-2009

(annual percent change)Central (Federal) government debt/ GDP

Country Period Below 30

percent

30 to 60

percent

60 to 90

percent

90 percent and

above

Australia 1902-2009 3.1 4.1 2.3 4.6Austria 1880-2009 4.3 3.0 2.3 n.a.

Belgium 1835-2009 3.0 2.6 2.1 3.3Canada 1925-2009 2.0 4.5 3.0 2.2Denmark 1880-2009 3.1 1.7 2.4 n.a.

Finland 1913-2009 3.2 3.0 4.3 1.9

France 1880-2009 4.9 2.7 2.8 2.3

Germany 1880-2009 3.6 0.9 n.a. n.a.

Greece 1884-2009 4.0 0.3 4.8 2.5

Ireland 1949-2009 4.4 4.5 4.0 2.4Italy 1880-2009 5.4 4.9 1.9 0.7Japan 1885-2009 4.9 3.7 3.9 0.7

Netherlands 1880-2009 4.0 2.8 2.4 2.0

New Zealand 1932-2009 2.5 2.9 3.9 3.6Norway 1880-2009 2.9 4.4 n.a. n.a.Portugal 1851-2009 4.8 2.5 1.4 n.a.

Spain 1850-2009 1.6 3.3 1.3 2.2Sweden 1880-2009 2.9 2.9 2.7 n.a.

United Kingdom 1830-2009 2.5 2.2 2.1 1.8

United States 1790-2009 4.0 3.4 3.3 -1.8

Average 3.7 3.0 3.4 1.7Median 3.9 3.1 2.8 1.9Number of observations = 2,317 866 654 445 352

Notes: An n.a. denotes no observations were recorded for that particular debt range. There are missingobservations, most notably during World War I and II years; further details are provided in the data

appendices to Reinhart and Rogoff (2009) and are available from the authors. Minimum and maximumvalues for each debt range are shown in bolded italics.

Sources: There are many sources, among the more prominent are: International Monetary Fund, World

Economic Outlook, OECD, World Bank, Global Development Finance. Extensive other sources are citedReinhart and Rogoff (2009).

B. Evidence from Emerging Market Countries

We next perform the same debt ratio exercise for 24 emerging market economies for the

periods 1946-2009 and 1900-2009, using comparable central government debt data as we used

for the advanced economies.7

Perhaps surprisingly, the results illustrated in Figure 4 and Table

2 for emerging markets largely repeat the results in Figure 2 and Table 1. For 1900-2009, for

7 While we have pre-1900 inflation, real GDP, and public debt data for many emerging markets, nominal GDP data

is seldom available.


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13

example, median and average GDP growth hovers around 4-4.5 percent for levels of debt below

90 percent of GDP but median growth falls markedly to 2.9 percent for high debt (above 90

percent); the decline is even greater for the average growth rate, which falls to 1 percent. With

much faster population growth than the advanced economies, the implications for per capita

GDP growth are in line (or worse) with those shown for advanced economies. The similarities

with advanced economies end there, as higher debt levels are associated with significantly higher

levels of inflation in emerging markets. Median inflation more than doubles (from less than 7

percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent.8

Fiscal dominance is a plausible interpretation of this pattern.

8 See Appendix Tables 1 and 2 for 1946-2009 summary statistics on growth and inflation, respectively, for advanced

economies and emerging markets.


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14

Figure 4. Public Debt, Growth, and Inflation: Selected Emerging Markets, 1946-2009

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0


GDPgrowth

5

7

9

11

13

15

17

19

Inflatio

Debt/GDP

below 30%

Debt/GDP

30 to 60%Debt/GDP

60 to 90%

Debt/GDP

above 90%

Median Inflation

(line, right axis)

GDP rowth bars left axis

Notes: The 24 emerging market countries included are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,

Ecuador, El Salvador, Ghana, India, Indonesia, Kenya, Korea, Malaysia, Mexico, Nigeria, Peru, Philippines,

Singapore, South Africa, Sri Lanka, Thailand, Turkey, Uruguay, and Venezuela. The number of observations for

the four debt groups are: 502 for debt/GDP below 30%; 385 for debt/GDP 30 to 60%; 145 observations fordebt/GDP 60 to 90%; and 110 for debt/GDP above 90%. There are a total of 1142 annual observations.

Sources: International Monetary Fund, World Economic Outlook, World Bank, Global Development Finance, andReinhart and Rogoff (2009b) and sources cited therein.


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15

Table 2. Real GDP Growth as the Level of Government Debt Varies:Selected Emerging Market Economies, 1900-2009


Central (Federal) government debt/ GDPCountry Period Below 30

percent

30 to 60

percent

60 to 90

percent

90 percent and

aboveArgentina 1900-2009 4.3 2.7 3.6 0.5

Bolivia 1950-2009 0.7 5.2 3.7 3.9Brazil 1980-2009 3.2 2.3 2.6 2.3Chile 1900-2009 4.0 1.0 7.5 -4.5

Colombia 1923-2009 4.3 3.0 n.a. n.a.

Costa Rica 1950-2009 6.9 5.0 3.4 3.0

Ecuador 1939-2009 5.3 5.0 3.2. 1.5

El Salvador 1939-2009 3.6 2.6 n.a. n.a.

Ghana 1952-2009 n.a. 4.6 4.7 1.9India 1950-2009 4.2. 4.9 n.a. n.a.

Indonesia 1972-2009 6.6 6.3 -0.1 3.1

Kenya 1963-2009 6.3 4.2 2.3 1.2

Malaysia 1955-2009 2.0 6.2 6.9 5.5Mexico 1917-2009 4.1 3.4 1.2. -0.7Nigeria 1990-2009 5.4 10.6 11.2 2.6.

Peru 1917-2009 4.3 2.9 2.7 n.a.Philippines 1950-2009 5.0 3.8 5.1 n.a.

Singapore 1969-2009 n.a. 9.5 8.2 4.0.

South Africa 1950-2009 2.0 3.5 n.a. n.a.

Sri Lanka 1950-2009 3.3 3.7 4.2 5.0Thailand 1950-2009 6.1 6.6 n.a. n.a.

Turkey 1933-2009 5.4 3.7 3.2 -6.4Uruguay 1935-2009 2.1 3.1 3.2 0.0

Venezuela 1921-2009 6.5 4.1 3.2 -6.5

Average 4.3 4.1 4.2 1.0

Median 4.5 4.4 4.5 2.9Number of observations = 1,397 686 450 148 113

Notes: An n.a. denotes no observations were recorded for that particular debt range. There are missingobservations for some years details are provided in the data appendices to Reinhart and Rogoff (2009) andare available from the authors. Minimum and maximum values for each debt range are shown in bolded

italics.

Sources: There are many sources, among the more prominent are: International Monetary Fund, WorldEconomic Outlook, OECD, World Bank, Global Development Finance. Extensive other sources are cited

Reinhart and Rogoff (2009).


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16

C. External Debts

Because emerging markets often depend so much on external borrowing, it is interesting

to look separately at thresholds for external debt (combined public and private). Combined

public and private sector debt is of interest because in the case of crisis, the distinction between

public and private often becomes blurred in a maze of bailouts, guarantees, and international

hard currency constraints (see Reinhart and Rogoff, 2009b).

In Figure 5, we highlight the connection between for gross external debt as reported by

the World Bank and growth and inflation. As one can see, the growth thresholds for external

debt are considerably lower than for the thresholds for total public debt. Growth deteriorates

markedly at external debt levels over 60 percent, and further still when external debt levels

exceed 90 percent, which record outright declines. In light of this, it is more understandable that

over one half of all defaults on external debt in emerging markets since 1970 occurred at levels

of debt that would have met the Maastricht criteria of 60 percent or less. Inflation becomes

significantly higher only for the group of observations with external debt over 90 percent.


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17

Figure 5. External Debt, Growth, and Inflation: Selected Emerging Markets, 1970-2009

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5


GDPgrowth

10

11

12

13

14

15

16

17

Inflatio

Debt/GDP

below 30%

Debt/GDP

30 to 60%

Debt/GDP

60 to 90%

Debt/GDP

above 90%

Inflation

(line, right axis)

GDP rowth bars , left axis

Notes: External debt includes public and private debts. The 20 emerging market countries included are Argentina,

Bolivia, Brazil, Chile, China, Colombia, Egypt, India, Indonesia, Korea, Malaysia, Mexico, Nigeria, Peru,

Philippines, South Africa, Thailand, Turkey, Uruguay, and Venezuela. The number of observations for the four debtgroups are: 252 for debt/GDP below 30%; 309 for debt/GDP 30 to 60%; 120 observations for debt/GDP 60 to

90%; and 74 for debt/GDP above 90%. There is a total of 755 annual observations.

Sources: International Monetary Fund, World Economic Outlook, World Bank, Global Development Finance, and

Reinhart and Rogoff (2009b) and sources cited therein.


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18

As noted in the introduction, there is no comparable long time series on total external

debt for advanced countries; the relatively new IMF data set we use begins only in 2003.

Although we have no historical benchmarks for the advanced countries, the summary results in

Figure 6, based on 2003-2009 gross external debt as a percent of GDP, is indeed disconcerting.

The left hand panel of the figure indicates whether there has been an increase in indebtedness to

GDP over the 2003-09 period, or a decrease (deleveraging.). The right hand panel gives the

ratio of gross external debt to GDP as of the end of the second quarter of 2009. The group

averages are based on a total data set of 59 countries.


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19

Figure 6. Gross External Debt as a Percent of GDP: Averages for Selected 59 Countries,2003-2009(in percent)

0 50 100 150 200

Europe-Advanced

Europe-Emerging

United States

Australia & Canada

Asia-Emerging

Former Soviet Union

Japan

Africa

Asia (ex. Hong Kong)

Latin America

Advanced economies

Emerging markets

Debt-to-GDP ratio-30 -10 10 30 50Change in debt-to-GDP ratio, 2003-2009

Increased

indebtedness

Deleveraging

Sources: International Monetary Fund, World Economic Outlook, World, Bank, Quarterly External Debt

Statistics (QUEDS), and authors calculations.Notes: Data for 2009 end in the second quarter. The countries participating in QUEDS included in these

calculations are listed in what follows by region.Advanced-Europe: Austria, Belgium, Denmark, Finland,

France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United

Kingdom, (15 countries). If Ireland were included, the averages would be substantially higher for thisgroup. Emerging Europe: Bulgaria, Croatia, Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania,Slovak Republic, Slovenia, and Turkey, (11 countries). Former Soviet Union: Armenia, Belarus, Georgia,

Kazakhstan, Kyrgyz Republic, Moldova, Russia, and the Ukraine (8 countries).Africa: Egypt, South

Africa, and Tunisia (3 countries). Asia-Emerging: Hong Kong, India, Indonesia, Korea, Malaysia,

Thailand (6 countries). Latin America: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador,

El Salvador, Mexico, Paraguay, Peru, and Uruguay (12 countries). There are a total of 19 advancedeconomies and 40 emerging markets.


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20

As the right hand side of the figure illustrates, external debt burdens are particularly high

in Europe, with an average external debt to GDP ratio across advanced European economies of

over 200 percent, and an average external debt to GDP across emerging European economies

roughly 100 percent.9

(The fact that a sizable share of these debts are intra-European may or

may prove a significant mitigating factor.) Interestingly, the United States gross debt liabilities

are less than half of Europes as a share of GDP, despite the countrys epic sequence of trade

balance deficits. Japan, despite having a gross public debt to GDP ratio approaching 200

percent, has much smaller gross external liabilities still, thanks in no small part to Japans

famously strong home bias in bond holdings.

Famously profligate Latin America, by contrast to the advanced economies, now has

gross external debt liabilities averaging only around 50 percent of GDP. Moreoever, in contrast

to the advanced countries who added an average of 50 percent of GDP to gross external debt

during the recent period, Latin American countries actually delivered external debt by over 30

percent of GDP.

Of course, given the lack of sufficient long-dated historical data on advanced economies

external debts, it is not possible to know whether they face similar thresholds to emerging

markets. It is likely that the thresholds are higher for advanced economies that issue most

external debt in their own currency.

IV. Private Sector Debt: An Illustration

9 In effect, if Ireland is added to the list, the average for advanced European economies rises to 266 percent!.


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21

Our main focus has been on total public and total external debt, since reliable data on

private internal domestic debts are much scarcer across countries and time. We have shown that

public levels of debt/GDP that push the 90 percent threshold are associated with lower median

and average growth; for emerging markets there are even stricter thresholds for external debt

while growth thresholds for advanced economies remains an open question due to the fact only

very recent data is available.10

These observations, however, present only a partial picture of the post-financial crisis

landscape, particularly for the years immediately following the crisis. Private debt, in contrast to

public debt, tends to shrink sharply for an extended period after a financial crisis. Just as a rapid

expansion in private credit fuels the boom phase of the cycle, so does serious deleveraging

exacerbate the post-crisis downturn. Just as a rapid expansion in private credit fuels the boom

phase of the cycle, so does serious deleveraging exacerbate the post-crisis downturn. This

pattern is illustrated in Figure 7, which shows the ratio of private debt to GDP for the United

States for 1916-2009. Periods of sharp deleveraging have followed periods of lower growth and

coincide with higher unemployment (as shown in the inset to the figure). In varying degrees,

the private sector (households and firms) in many other countries (notably both advanced and

emerging Europe) are also unwinding the debt built up during the boom years. Thus, private

deleveraging may be another legacy of the financial crisis that may dampen growth in the

medium term.

10 It is important to note that post crises increases in public debt do not necessarily push economies in to the

vulnerable 90+ debt/GDP range.


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22

Figure 7. United States: Private Debt Outstanding, 1916-2009

(end-of- period stock of debt as a percent of GDP)

Years

with Debt/GDP 1916-1939 1946-2009

declines 9.8 7.2

All other years 6.7 5.5

Unemployment rate

Median

20

70

120

170

220

270

320

1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Historical Statistics

of the United States

Flow of Funds

Percent

Notes: Data for 2009 is end-of-June.

Sources: Historical Statistics of the United States, Flow of Funds, Board of Governors of the Federal Reserve

International Monetary Fund, World Economic Outlook, OECD, World Bank, Global Development Finance, andReinhart and Rogoff (2009b) and sources cited therein.

V. Concluding Remarks

The sharp run-up in public sector debt will likely prove one of the most enduring legacies

of the 2007-2009 financial crises in the United States and elsewhere. We examine the

experience of forty four countries spanning up to two centuries of data on central government

debt, inflation and growth. Our main finding is that across both advanced countries and

emerging markets, high debt/GDP levels (90 percent and above) are associated with notably

lower growth outcomes. In addition, for emerging markets, there appears to be a more stringent


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23

threshold for total external debt/GDP (60 percent), that is also associated with adverse outcomes

for growth. Seldom do countries simply grow their way out of deep debt burdens.

Why are there thresholds in debt, and why 90 percent? This is an important question that

merits further research, but we would speculate that the phenomenon is closely linked to logic

underlying our earlier analysis of debt intolerance in Reinhart, Rogoff, and Savastano (2003).

As we argued in that paper, debt thresholds are importantly country-specific and as such the four

broad debt groupings presented here merit further sensitivity analysis. A general result of our

debt intolerance analysis, however, highlights that as debt levels rise towards historical limits,

risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs.

Even countries that are committed to fully repaying their debts are forced to dramatically tighten

fiscal policy in order to appear credible to investors and thereby reduce risk premia. The link

between indebtedness and the level and volatility of sovereign risk premia is an obvious topic

ripe for revisiting in light of the more comprehensive cross-country data on government debt.

Of course, there are other vulnerabilities associated with debt buildups that depend on the

composition of the debt itself. As Reinhart and Rogoff (2009b, ch. 4) emphasize and numerous

models suggest, countries that choose to rely excessively on short term borrowing to fund

growing debt levels are particularly vulnerable to crises in confidence that can provoke very

sudden and unexpected financial crises. Similar statements could be made about foreign

versus domestic debt, as discussed. At the very minimum, this would suggest that traditional debt

management issues should be at the forefront of public policy concerns.

Finally, we note that even aside from high and rising levels of public debt, many

advanced countries, particularly in Europe, are presently saddled with extraordinarily high levels


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24

of total external debt, debt issued abroad by both the government and private entities. In the case

Europe, the advanced country average exceeds 200 percent external debt to GDP. Although we

do not have the long-dated time series needed to calculate advanced country external debt

thresholds as we do for emerging markets, current high external debt burdens would also seem to

be an important vulnerability to monitor.

REFERENCES

Barro, Robert J. 1979. On the Determination of the Public Debt, The Journal of Political

Economy, Vol. 85, No. 5: 940-971.

Jeanne, Olivier and Anastasia Gucina 2006. Government Debt in Emerging Market

Countries: A New Data Set. International Monetary Fund Working Paper 6/98. Washington

DC.

Reinhart, Carmen M., and Kenneth S. Rogoff. 2009a. The Aftermath of Financial Crises.

American Economic Review, Vol. 99, No. 2: 466-472.

Reinhart, Carmen M., and Kenneth S. Rogoff. 2009b.This Time is Different: Eight Centuries

of Financial Folly. Princeton, NJ: Princeton Press.

Reinhart, Carmen M., and Kenneth S. Rogoff, and Miguel Savastano. 2003. Debt

Intolerance in William Brainerd and George Perry (eds.),Brookings Papers on Economic

Activity.


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25

Appendix Table 1. Real GDP Growth as the Level of Debt Varies: Summary


Measure Period Below 30

percent

30 to 60

percent

60 to 90

percent

90 percent and

above

Central (Federal) government debt/ GDP-

Advanced economies

Average 1946-2009 4.1 2.8 2.8 -0.1

Median 1946-2009 4.2 3.0 2.9 1.6

Emerging Markets

Average 1946-2009 4.3 4.8 4.1 1.3

Median 1946-2009 5.0 4.7 4.6 2.9

Total (public plus private) Gross External Debt/GDP

Average 1970-2009 5.2 4.9 2.5 -0.2

Median 1970-2009 5.1 5.0 3.2 2.4

Appendix Table 2. Inflation as the Level of Debt Varies: Summary(annual percent change)

Measure Period Below 30

percent

30 to 60

percent

60 to 90

percent

90 percent and

above

Central (Federal) government debt/ GDP

Advanced economies

Average 1946-2009 6.4 6.3 6.4 5.1Median 1946-2009 5.2 3.7 3.5 3.9

Emerging MarketsAverage 1946-2009 64.8 39.4 105.9 119.6

Median 1946-2009 6.0 7.5 11.7 16.5

Total (public plus private) Gross External Debt/GDP

Average 1970-2009 10.3 17.0 37.1 23.4Median 1970-2009 10.9 12.1 13.2 16.6


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5/1/13 9:28 PMDebt, Growth and the Austerity Debate - NYTimes.com

Page 1 of 3http://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.html?pagewanted=print

April 25, 2013

Debt, Growth and the Austerity DebateBy CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass.

IN May 2010, we published an academic paper, Growth in a Time of Debt. Its main finding,

drawing on data from 44 countries over 200 years, was that in both rich and developing

countries, high levels of government debt specifically, gross public debt equaling 90 percent

or more of the nations annual economic output was associated with notably lower rates of

growth.

Given debates occurring across the industrialized world, from Washington to London to

Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along

with other research we have published, has frequently been cited and, often, exaggerated or

misrepresented by politicians, commentators and activists across the political spectrum.

Last week, three economists at the University of Massachusetts, Amherst, released a paper

criticizing our findings. They correctly identified a spreadsheet coding error that led us to

miscalculate the growth rates of highly indebted countries since World War II. But they also

accused us of serious errors stemming from selective exclusion of relevant data and

unconventional weighting of statistics charges that we vehemently dispute. (In an online-

only appendix accompanying this essay, we explain the methodological and technical issues that

are in dispute.)

Our research, and even our credentials and integrity, have been furiously attacked in

newspapers and on television. Each of us has received hate-filled, even threatening, e-mail

messages, some of them blaming us for layoffs of public employees, cutbacks in government

services and tax increases. As career academic economists (our only senior public service has

been in the research department at the International Monetary Fund) we find these attacks a

sad commentary on the politicization of social science research. But our feelings are not whats

important here.

The authors of the paper released last week Thomas Herndon, Michael Ash and Robert Pollin

say our findings have served as an intellectual bulwark in support of austerity politics and

urge policy makers to reassess the austerity agenda itself in both Europe and the United

States.
http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://tv.msnbc.com/2013/04/24/debunked-the-harvard-study-that-republicans-used-to-push-austerity/http://www.nytimes.com/2013/04/26/opinion/reinhart-and-rogoff-responding-to-our-critics.htmlhttp://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/http://tv.msnbc.com/2013/04/24/debunked-the-harvard-study-that-republicans-used-to-push-austerity/http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.htmlhttp://www.nytimes.com/2013/04/26/opinion/reinhart-and-rogoff-responding-to-our-critics.htmlhttp://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/http://scholar.harvard.edu/files/rogoff/files/growth_in_time_debt_aer.pdf


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A sober reassessment of austerity is the responsible course for policy makers, but not for the

reasons these authors suggest. Their conclusions are less dramatic than they would have you

believe. Our 2010 paper found that, over the long term, growth is about 1 percentage point lower

when debt is 90 percent or more ofgross domestic product. The University of Massachusetts

researchers do not overturn this fundamental finding, which several researchers have

elaborated upon.

The academic literature on debt and growth has for some time been focused on identifying

causality. Does high debt merely reflect weaker tax revenues and slower growth? Or does high

debt undermine growth?

Our view has always been that causality runs in both directions, and that there is no rule that

applies across all times and places. In a paper published last year with Vincent R. Reinhart, we

looked at virtually all episodes of sustained high debt in the advanced economies since 1800.

Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as

conservative politicians have suggested.

We did find that episodes of high debt (90 percent or more) were rare, long and costly. There

were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more;

the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower

during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an

average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a

2.3 percent rate, on average, at higher relative debt levels.

(In 2012, the ratio of debt to gross domestic product was 106 percent in the United States, 82

percent in Germany and 90 percent in Britain in Japan, the figure is 238 percent, but Japan

is somewhat exceptional because its debt is held almost entirely by domestic residents and it is a

creditor to the rest of the world.)

The fact that high-debt episodes last so long suggests that they are not, as some liberal

economists contend, simply a matter of downturns in the business cycle.

In This Time Is Different, our 2009 history of financial crises over eight centuries, we found

that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was

even possible at all. The current situation confronting Italy and Greece, whose debts date from

the early 1990s, long before the 2007-8 global financial crisis, support this view.

The politically charged discussion, especially sharp in the past week or so, has falsely equated

our finding of a negative association between debt and growth with an unambiguous call forausterity.
http://online.wsj.com/public/resources/documents/JEP0413.pdfhttp://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/gross_domestic_product/index.html?inline=nyt-classifierhttp://www.ft.com/intl/cms/s/0/9e5107f8-a75c-11e2-9fbe-00144feabdc0.html#axzz2RVSaldzD


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We agree that growth is an elusive goal at times of high debt. We know that cutting spending

and raising taxes is tough in a slow-growth economy with persistent unemployment. Austerity

seldom works without structural reforms for example, changes in taxes, regulations and labor

market policies and if poorly designed, can disproportionately hit the poor and middle class.

Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position

identical to that of most mainstream economists.

In some cases, we have favored more radical proposals, including debt restructuring (a polite

term for partial default) of public and private debts. Such restructurings helped deal with the

debt buildup during World War I and the Depression. We have long favored write-downs of

sovereign debt and senior bank debt in the European periphery (Greece, Portugal, Ireland,

Spain) to unlock growth.

In the United States, we support reducing mortgage principal on homes that are underwater

(where the mortgage is higher than the value of the home). We have also written about plausible

solutions that involve moderately higher inflation and financial repression pushing down

inflation-adjusted interest rates, which effectively amounts to a tax on bondholders. This

strategy contributed to the significant debt reductions that followed World War II.

In short: many countries around the world have extraordinarily high public debts by historical

standards, especially when medical and old-age support programs are taken into account.

Resolving these debt burdens usually involves a transfer, often painful, from savers to

borrowers. This time is no different, and the latest academic kerfuffle should not divert our

attention from that fact.

Carmen M. Reinhartis a professor of the international financial system, andKenneth S. Rogoffis a

professor of public policy and economics, both at Harvard.

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5/1/13 9:20 PMReinhart and Rogoff - Responding to Our Critics - NYTimes.com

Page 1 of 6http://www.nytimes.com/2013/04/26/opinion/reinhart-and-rogoff-resto-our-critics.html?pagewanted=3&pagewanted=all&pagewanted=print

April 25, 2013

Reinhart and Rogoff: Responding to Our

CriticsBy CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass.

LAST week, we were sent a sharply worded paper by three researchers from the University of

Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in

our article Growth in a Time of Debt, published in May 2010 in the Papers and Proceedings of

the American Economic Review. In an Op-Ed essay for The New York Times, we have tried to

defend our research and refute the distorted policy positions that have been attributed to us. In

this appendix, we address the technical issues raised by our critics.

These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet

calculation error, but also accused us of two serious errors: selective exclusion of available

data and unconventional weighting of summary statistics.

We acknowledged the calculation error in an online statement posted the night we received the

article, but we adamantly deny the other accusations.

They neglected to report that we included both median and average estimates for growth, at

various levels of debt in relation to economic output, going back to 1800. Our paper gave

significant weight to the median estimates, precisely because they reduce the problem posed by

data outliers, a constant source of concern when doing archival research that reaches far back

into economic history spanning several periods of war and economic crises.

When you look at our median estimates, they are actually quite similar to those of the University

of Massachusetts researchers. (See the attached table.)

Moreover, our critics omitted mention of our paper Public Debt Overhangs: Advanced-

Economy Episodes Since 1800, with Vincent R. Reinhart, published last summer, in The

Journal of Economic Perspectives. That paper, which is more thorough than the 2010 paper

under attack, gives an average estimate for growth when a countrys debt-to-G.D.P. ratio

exceeds 90 percent of 2.3 percent compared to our critics figure of 2.2 percent. (Also see the

comparisons posted by the blogger known as F. F. Wiley, including his chart, a copy of which

accompanies this essay.)
http://www.aeaweb.org/articles.php?doi=10.1257/jep.26.3.69http://www.nytimes.com/interactive/2013/04/17/business/17economix-response.htmlhttp://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/http://www.cyniconomics.com/2013/04/22/hap-vs-rr-vs-the-pundits-scoring-the-reinhart-rogoff-dispute/http://www.aeaweb.org/articles.php?doi=10.1257/jep.26.3.69http://www.nytimes.com/interactive/2013/04/17/business/17economix-response.htmlhttp://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.htmlhttp://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa6388b1/publication/566/


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Despite the very small actual differences between our critics results and ours, some

commenters have trumpeted the new paper as a fundamental reassessment of the literature on

debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made

the same claim in anApril 17 essay in The Financial Times, where they also ignore our strong

exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a nonconventional

weighting procedure. It is the accusation that our weighting procedure is nonconventional thatis itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of

the University of California, San Diego,wrote (without consulting us) that to suggest that there

is some deep flaw in the method used by RR or obvious advantage to the alternative favored by

HAP is in my opinion quite unjustified. (He was using the initials for the last names of the

economists involved in this matter.)

Above all, our work hardly amounts to the whole literature on the relationship between debt and

growth, which has grown rapidly even since our 2010 paper was published. A number of carefulempirical studies have found broadly similar results to ours. But this is not the definitive word,

as a smaller number of just as scholarly papers have not found a robust relationship between

debt and growth. (Our paper in The Journal of Economic Perspectives included a review of that

literature.)

Researchers at the Bank of International Settlements and the International Monetary Fund have

weighed in with their own independent work. The World Economic Outlook published last

October by the International Monetary Fund devoted an entire chapter to debt and growth. Themost recent update to that outlook, released inApril, states: Much of the empirical work on

debt overhangs seeks to identify the overhang threshold beyond which the correlation between

debt and growth becomes negative. The results are broadly similar: above a threshold of about

95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a

decline in annual growth of about 0.15 to 0.20 percent per year.

This view generally reflects the state of the art in economic research, and the I.M.F. goes on to

give many more subtleties. We have never complained as the body of work we helped to buildhas evolved instead, we have tried to learn from it. In contrast, our critics have politicized the

issue, noting the citation of our research by Representative Paul D. Ryan of Wisconsin, the

Republican vice-presidential nominee last year.

Our critics seem to suggest that they can ignore everything else we have done because we are

somehow going around placing great emphasis on one outlier estimate for growth. This is

wrong. We have never used anything but the conservative median estimate in our public

discussions, where we stated that the difference between growth associated with debt under 90percent of G.D.P. and debt over 90 percent of G.D.P. is about 1 percentage point. See, for
http://www.imf.org/external/pubs/ft/weo/2013/01/index.htmhttp://www.econbrowser.com/archives/2013/04/reinhartrogoff_1.htmlhttp://weber.ucsd.edu/&http://www.ft.com/intl/cms/s/0/9e5107f8-a75c-11e2-9fbe-00144feabdc0.html


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example, a Bloomberg Businessweek article from July 2011 that has been cited as evidence that

we are fiscal hawks. In that article, we cite only the median.

Some have claimed that where we have really done damage is not in our public statements, but

in what we say behind closed doors to policy makers. Some of those discussions have indeed

leaked out over time, but they consistently show that our focus has been the median estimate.

We might add that when we give public opinions and especially when we give policy advice, we

base our ideas on our entire experience and knowledge of the literature, never just on our own

work.

We are glad the debate has sparked a huge interest in the whole topic, and hope research will

now evolve even more quickly. We have shared our data with hundreds of researchers and since

2011 have posted the difficult-to-reconstruct historical debt-to-G.D.P. ratios online in

thoroughly documented spreadsheets. The project of posting our data set relating to financial

crises is a daunting task. It was the basis for our 2009 book, This Time Is Different, which was

well received throughout the economics profession.

We took great pains to provide the data in as accessible form as possible, including especially

meticulous source documentation in the spreadsheets, far more than one sees normally posted

with journal papers. So we are simply stunned when bloggers and irresponsible commentators

say we have not shared our debt data. Open access to our data has been central to our whole

project.

As for the accusations of selective omission of data, there is little appreciation that this is

archival research, involving constant judgments at every step. The New Zealand data we used

was part of the problem that Herndon and his colleagues allude to biasing the results in favor of

lower growth at higher levels of debt. We have since incorporated the correct data in our

Journal of Economic Perspectives paper.

Oddly, Herndon and his colleagues do not mention another data omission. This one wasintentional on our part. Back in 2010, we were still sorting inconsistencies in Spanish G.D.P.

data from the 1960s from three different sources. Our primary source for real G.D.P. growth was

the work of the economic historian Angus Madison. But we also checked his data and, where

inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and

Spains monumental and scholarly historical statistics, had very different numbers. In our 2010

paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would

have strengthened our results, since Spain had very low public debt in the 1960s (under 30

percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over thatperiod. We later reconciled this problem for our 2012 paper. This is just an example of what our
http://www.reinhartandrogoff.com/data/http://www.businessweek.com/news/2011-07-14/too-much-debt-means-the-economy-can-t-grow-reinhart-and-rogoff.html


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archival research involves; it is not simply a matter of filling in cells on an Excel spreadsheet

from sanitized, easy-to-use databases.

We conclude with a few thoughts to supplement our broader discussion of the issues in our Op-

Ed piece. First, we reiterate that the frontier question for research is the issue of causality.

Clearly, recessions can cause higher debt, and in some extreme cases drive debt to over 90

percent, though such extreme jumps are rare outside of a financial crisis. We ourselves, in our

2009 book, showed that for postwar systemic financial crises, the average rise in the debt-to-

G.D.P. ratio after three years is 86 percent. But in our Journal of Economic Perspectives paper,

we show that the duration of high-debt episodes (debt over 90 percent of G.D.P.) is very long

indeed. The paper contains a case-by-case description of each debt overhang episode in

advanced economies since 1800. As we note in our essay for The Times, the long duration of the

overhangs, averaging 23 years, makes it hard to argue that they are simply the result of

recessions driving up debt. We also note in that article that roughly half of all debt overhangepisodes are associated with elevated real interest rates, suggesting the kind of vicious feedback

loop between debt and growth that the periphery countries of the euro zone are currently

suffering. In our view, the only way to break this feedback loop is to have dramatic write-downs

of debt.

We also note that a little under half of all cases do not involve higher real interest rates, such as

the recent Japanese experience. Our Op-Ed essay gives reasons debt might still matter,

including the way in which it crowds out fiscal space and limits the economys capacity torespond to shocks. But the root of the problem is still probably the fact that as debt rises, so too

does the risk that a turn in interest rates might suddenly take the country from a seemingly safe

debt situation to an unsustainable one. The economic literature is replete with examples of this,

and many forecasts suggest long-term interest rates will rise significantly over the next decade.

The basic problem for fiscal policy is that interest rates can turn very quickly but debt ratios

cannot. So, most countries sensibly exercise some prudence as debt rises. Perhaps they are

overly cautious. But the fact that debt levels over 90 percent of G.D.P. are rare (roughly 8percent of postwar observation in advanced economies) and debt levels over 120 percent of

G.D.P. are very rare. It is true that Japan has been an outlier since the 1990s, with gross public

debt to G.D.P. exceeding 230 percent. But this ignores the fact that Japan, unlike the United

States, is a creditor nation, holding massive dollar reserves that somewhat offset its debt. Until

recently, it has always been running a current surplus with the rest of the world while the

United States needs to borrow. Some have also used the example of Britain in the 18th century,

when gross debt also exceeded 200 percent of G.D.P. Indeed, we include this and any other

episode lasting longer than five years for which the data is available.


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The graduate students now poring over debt data should consider using the five-year filter used

in our 2012 paper. This does not turn out to exclude all that many debt overhang experiences,

but it does filter out a few associated with short recessions and postwar remobilizations. The big

question today is not how economies do with high debt after a war, but how to handle high

debts in peacetime. After a war, when physical capital is destroyed, but human capital remains,

it is often possible to rebuild faster. There are also many efficiency benefits from releasingwartime controls and bringing manpower to productive use. But the first few years of such

experiences, in any event, might not necessarily capture the problem that one is interested in, of

todays peacetime deficits. Again, in our 2012 paper, we explore many reasons debt overhang

might matter for growth, at least in theory. But much more needs to be understood.

We again turn readers to our Op-Ed essay to understand ideas for bringing debt down. To

reiterate, there are four solutions: slow growth and austerity for a very long time, elevated

inflation, financial repression and debt restructuring. We have long emphasized the need to usethe whole tool kit creatively in the aftermath of a once-in-75-year financial crisis. One of us has

widely discussed using financial repression as a means of dealing high debt. Even at the outset

of the crisis, one of us advocated mildly high inflation. AProject Syndicate column in December

2008 advocated moderately elevated inflation as means of getting the economy moving again, in

part by taking some edge off public and private debts. Bill Clintons 2011 book Right to Work

cites our proposals to write down subprime mortgage debt on a large scale.

Early on in the financial crisis, in a February2009 Op-Ed, we concluded that authoritiesshould be prepared to allow financial institutions to be restructured through accelerated

bankruptcy, if necessary placing them under temporary receivership.

Significant debt restructurings and write-downs have always been at the core of our proposal for

the periphery European Union countries, where it seems to us unlikely that a mix of structural

reform and austerity will work.

Finally, we view ourselves as scholars, though obviously given the prominence of book, and the

extraordinary circumstances of the financial crisis, politicians will of course try to use our

results to advance their cause. We have never advised Mr. Ryan, nor have we worked for

President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of

the 2012 Economic Report of the President, recreating and extending the results.

In the campaign, we received great heat from the right for allowing our work to be used by

others as a rationalization for the countrys slow recoveryfrom the financial crisis. Now we are

being attacked by the left primarily by those who have a view that the risks of higher public

debt should not be part of the policy conversation. Above all, we resent the attempt to impugn
http://www.bloomberg.com/news/2012-10-15/sorry-u-s-recoveries-really-aren-t-different.htmlhttp://online.wsj.com/article/SB123362438683541945.htmlhttp://www.project-syndicate.org/commentary/inflation-is-now-the-lesser-evilhttp://www.project-syndicate.org/commentary/inflation-is-now-the-lesser-evilhttp://www.bloomberg.com/news/2012-03-11/financial-repression-has-come-back-to-stay-carmen-m-reinhart.html


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our academic integrity. Doing archival research involves making constant judgments and yes,

on occasion, mistakes. Learning from them is how science advances. We hope that we and

others can learn from ours.

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5/1/13 9:24 PMComparing the

reinhart and rogoff

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