'A Note on Debt, Growth and Causality'

Arin Dube (via email):

Spurred by renewed interest on the topic, especially as evidenced by the
work by Kimball and Wang,  I decided to finally post this short working
paper on my website that
builds on my guest
blog post from a month and half ago:

A Note on Debt, Growth and Causality: Abstract: This
note documents the timing in the relationship between the debt-to-GDP ratio
and real GDP growth in advanced economies during the post World War II
period using the Reinhart and Rogoff dataset. I first show that the
debt ratio is more clearly associated with the 5-year past average growth
rate, rather than the 5-year forward average growth rate–indicating a
problem of reverse causality. Indeed, there is little evidence of a lower
growth rate above the 90 percent threshold when using the 5-year forward
average growth rate. I use a number of simple tools to account for some of
the reverse causality in the bivariate regression–such as using forward
growth rate, instrumenting the current debt ratio with its lag, and
controlling for lagged GDP growth rates. These simple methods of
accounting for reverse causality diminish the size of the association by
between 50 and 70 percent, with the linear regression estimate
indistinguishable from zero. Finally non- and semi-parametric plots provide
visual confirmation that the relationship between debt-to-GDP ratio and
growth is essentially flat for debt ratios exceeding 30 percent when we (1)
use forward growth rates, (2) control for past GDP growth, or both.

Here’s the Kimball and Wang work he mentions:

After Crunching Reinhart and Rogoff’s Data, We Found No Evidence That High Debt
Slows Growth.