The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area

This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point - beyond which the government debt-to-GDP ratio has a negative impact on long-term growth - at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70 to 80% of GDP. The channels through which government debt is found to have a non-linear impact on the economic growth rate are private saving, public investment and total factor productivity.

► We analyse the impact of government debt on GDP growth across euro area countries. ► Find an inverted U-shape relation with debt turning point at about 90-100% of GDP. ► Relevant transmission channels: private saving, public investment and TFP.