The real effects of debt
Posted: Sat Apr 20, 2013 7:58 pm
http://www.bis.org/publ/othp16.pdf
Cecchetti, Mohanty and Zampolli
The real effects of debt
The real effects of debt
Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli
*
September 2011
Abstract
At moderate levels, debt improves welfare and enhances growth. But high levels can be
damaging. When does debt go from good to bad? We address this question using a new
dataset that includes the level of government, non-financial corporate and household debt in
18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain
level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP.
The immediate implication is that countries with high debt must act quickly and decisively to
address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer
required to address extraordinary events, gov
ernments should keep debt well below the
estimated thresholds. Our examination of other types of debt yields similar conclusions.
When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for
household debt, we report a threshold around 85% of GDP, although the impact is very
imprecisely estimated.