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A contribution to the Reinhart and Rogoff debate: not 90 percent but maybe 30 percent

Authors: Sokbae (Simon) Lee , Hyunmin Park , Myung Hwan Seo and Youngki Shin
Date: 01 September 2014
Type: cemmap Working Paper, CWP39/14
DOI: 10.1920/wp.cem.2014.3914

Abstract

Using the Reinhart-Rogoff dataset, we fi nd a debt threshold not around 90 percent but around 30 percent, above which the median real GDP growth falls abruptly. Our work is the first to formally test for threshold eff ects in the relationship between public debt and median real GDP growth. The null hypothesis of no threshold eff ect is rejected at the 5 percent signi cance level for most cases. While we fi nd no evidence of a threshold around 90 percent, our fi ndings suggest that the debt threshold for economic growth may exist around a relatively small debt-to-GDP ratio of 30 percent. Empirical results are more robust with the postwar sample than the long sample that goes before World War II.

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