Does debt predict growth? An empirical analysis of the relationship between total debt and economic output

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Willem Vanlaer
Wim Marneffe
Lode Vereeck
Johan Vanovertveldt

Abstract

Although the recent global financial crisis has stimulated a vast amount of research on the impact of public debt on economic growth and also increasingly on the role of private credit, the total levels of indebtedness of an economy have largely been ignored. This paper studies the impact of the total level of and increases in debt-to-GDP on economic growth for 26 developed countries in the short, medium and longer term. We analyse whether we can predict the future level of growth, simply by looking at the total level of debt, or increases in that debt level. We find that there is a negative correlation between high levels of debt and short term economic growth, but that this effect tapers in the medium and long term. Similarly, we find that rapid debt accumulation is negatively related to economic growth over the short term, the impact is less pronounced over the medium term and is non-existent over the long term.

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Author Biographies

Wim Marneffe, Hasselt University

Wim Marneffe is Professor at Hasselt University, BE. Contact: Hasselt University, Faculty of Applied Economics, Martelarenlaan 42, BE-3500 Hasselt.

Lode Vereeck, Hasselt University

Lode Vereeck is Professor at Hasselt University, BE. Contact: Lode Vereeck, Hasselt University, Faculty of Applied Economics, Martelarenlaan 42, BE-3500 Hasselt.

Johan Vanovertveldt, Hasselt University

Johan Van Overtveldt is Professor at Hasselt University, BE. Contact: Johan Vanovertveldt, Hasselt University, Faculty of Applied Economics, Martelarenlaan 42, BE-3500 Hasselt.

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