Public debt and economic growth

In the aftermath of the economic crisis, the eurozone and others have responded to the spectre of high debt by pursuing austerity policies. To assess the prudency of this strategy and optimize future policy, a more thorough understanding of the causal link between public debt and economic growth is paramount. This paper presents a wide ranging overview into the available literature concerning the relationship between public debt and economic growth. This is supplemented by a statistical analysis of this relationship using extensive panel data of 20 OECD countries from 1880 till 2011 employing both a fixed-effect ordinary least squares regression and an instrumental variable approach. Consistent with much of the literature, a negative effect of debt on growth is found. The possible evidence in the literature of debt thresholds beyond which growth reduces sharply is found to lack robustness