from the Dallas Fed
— this post authored by Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi
The relationship between public debt expansion and economic growth has attracted interest in recent years, spurred by a sharp increase in government indebtedness in some advanced economies following the global financial crisis.
Economists tend to agree that in the short run, an increase in public debt arising from fiscal expansion stimulates aggregate demand, which should help the economy grow. The longer-term economic impact of public debt accumulation, in contrast, is subject to a more expansive debate.
Some argue there is a negative long-term relationship between debt and economic growth, others doubt there is a long-term association between the two for low or moderate levels of public debt. Still others disregard any long-term association.
A careful empirical examination of this relationship using a panel of 40 advanced and emerging economies and four decades of data indicates that a persistent accumulation of public debt over long periods is associated with a lower level of economic activity. Moreover, the evidence suggests that debt trajectory can have more important consequences for economic growth than the level of debt to gross domestic product (GDP).
Continuous debt accumulation can harm economic growth through several channels, such as “crowding out” private investment, higher long-term interest rates, more aggressive future taxation, and possibly weaker investor sentiment and greater uncertainty.
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Source
https://www.dallasfed.org/~/media/documents/research/eclett/2018/el1803.pdf
