Evidence on the Effect of Government Debt on Country Economic Growth

Abstract

The debate continues as to whether the effect of government debt and its effect on real economic growth is positive or negative. Some posit that country Real Economic Growth increases with higher public debt while others argue that Real Economic Growth decreases with higher public debt. Real economic growth is modeled as a non-linear function of government debt as a percentage of GDP. Cross section data for Percent Change in Real GDP and Debt as a Percent of GDP for 208 countries was used for years 2011 to 2019. A parameterized nonlinear regression model finds Real Economic Growth to increase to a point corresponding to reasonable levels of debt and then decrease for excessive levels of debt. This study finds that growth is invariant to the size of the economy.