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Growth in a Time of Debt Carmen M. Reinhart , Kenneth S. Rogoff January 2010

Growth in a Time of Debt Carmen M. Reinhart , Kenneth S. Rogoff January 2010. Aneta Mária Kocúnová Valéria Kováčová. Content. Introduction The 2007-2009 Global Buildup in Public Debt Relation between growth, debt and interest rates Evidence from Advanced Countries

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Growth in a Time of Debt Carmen M. Reinhart , Kenneth S. Rogoff January 2010

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  1. Growth in a Time of DebtCarmen M. Reinhart, Kenneth S. RogoffJanuary 2010 Aneta Mária Kocúnová Valéria Kováčová

  2. Content • Introduction • The 2007-2009 Global Buildup in Public Debt • Relation between growth, debt and interest rates • Evidence from Advanced Countries • Evidence from Emerging Market Countries • Concluding Remarks • References

  3. Introduction • In this paper we search for a systemic relationship between high public debt levels, growth and inflation • Our approach is empirical, taking advantage of a broad new historical dataset on public debt. • Our results are based on data from 44 countries in time range of 200 years • The focus of this paper is on the longer term macroeconomic implications of much higher public and external debt.

  4. Introduction • We also use data on external debt (both by governments and private entities) • For emerging countries there exists more strict border for total gross external debt than for total public debt. • Relation between debt and growth in emerging markets:

  5. TheGlobal Buildup in Public Debt Cumulative Increase in Real Public Debt 2007-2009

  6. TheGlobal Buildup in Public Debt • For the first five countries in the figure, debt rose by an average of about 75%. • For the countries which did not experience a major financial crisis, debt rose by an average of about 20%. • This general rise in public indebtedness stands in contrast to the 2003-2006 period. • As a result, many countries adopted the stimulus packages to deal with the global recession.

  7. Relation between debt, growth and interest rate • The nonlinear effect of debt on growth is related to a nonlinear response of market interest rates. • What is “debt intolerance?“ Debt of emerging market countries is strictly control by advanced economies. • War debts are less problematic for future growth than debts accumulated in peace time because they come to natural end as peace returns.

  8. Evidence from Advanced Countries Government Debt, Growth and Inflation 1946-2009

  9. Evidence from Advanced Countries • From the figure, it is evident that there is no obvious link between debt and growth until public debt reaches a boarder of 90% • The line in figure plots the median inflation for the different debt groupings- which shows that there is no apparent pattern of simultaneous rising inflation and debt.

  10. Real GDP growth as the level of government debt varies 1790-2009

  11. Evidence from Advanced Countries Table provides detail on the growth experience for individual countries There is considerable variation across the countries (Australia, 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.

  12. Evidence from Emerging Market Countries • Similarities with advanced countries: • With much faster population growth the implications for per capita GDP growth are in line (or worse) • Differences • Higher debt levels are associated with significantly higher levels of inflation (in emerging markets). Median inflation more than doubles as debt rises fromthelow range to above 90%.

  13. External debt, growth and inflation. 1970-2009

  14. Evidence from Emerging Market Countries • Emerging markets often depend so much on external borrowing that it is interesting to look separately at thresholds for external debt. • Growth declines markedly at external levels over 60% • Inflation becomes significantly higher only for group with external debt over 90%

  15. Concluding Remarks • The most significant legacy of financial crisis in 2007-2009 is the sharp run-up in public sectordebt. • Main finding is that across bothadvanced and emerging markets high debt levels are associated with lower growth outcomes. • When countries hit debt tolerance ceilings marketinterest rates can begin to rise quite suddenly, forcing painful adjustments.

  16. Concluding Remarks • Reinhert and Rogoff emphasize that countries which rely on short-term borrowing to fund growing debt can suddenly and unexpectedly fall down intofinancial crises. • For this reason, traditional debt management issues should be at the forefront of public policy concerns.

  17. References • Reinhart,  Carmen  M.,  and  Kenneth  S.  Rogoff. (2008. “The Forgotten History of Domestic Debt.” National Bureau of Economic Research Working Paper 13946.) • Reinhart,  Carmen  M.,  and  Kenneth  S.  Rogoff. (2009a. “The Aftermath of Financial Crises.” American Economic Review, 99(2): 466–72.) • Reinhart,  Carmen  M.,  and  Kenneth  S.  Rogoff. (2009b. this time Is Different: Eight Centuries of financial folly. Princeton, NJ: Princeton University Press.) • Reinhart,  Carmen  M.,  Kenneth  S.  Rogoff,  and Miguel  A.  Savastano.  2003. “Debt Intolerance.” Brookings Papers on Economic Activity (1), ed. William C. Brainard and George L. Perry, 1–62.)

  18. Thank you for your attention.

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