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"Lessons from the 2013 Public Debt and Growth 
Debate: How to Assess Economic Sustainability" 
Thomas Herndon, Doctoral Candidate 
University of Massachusetts Amherst, Department of Economics and 
Political Economy Research Institute 
9-23-2014
Outline 
• 2013 Reinhart-Rogoff/HAP Public Debt and Growth Debate 
• Problems Identified in literature 
• Problems with Causality: Debt -> Growth? 
• Endogeneity 
• Panizza and Presbitero 
• Problems with estimating debt thresholds 
• Endogeneity 
• Kourtellos, Stengos, Tan 
• Heterogeneity 
• Eberhardt and Presbitero
Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
Problems with Causality 
• Does high debt cause slow growth, or is it reverse causality? 
• Early review of Literature – Panizza and Presbitero (2013) 
• “While many papers have found a negative correlation between debt and 
growth, our reading of the empirical literature is that theres is no paper that 
can make a strong case for a causal relationship going from debt to economic 
growth.” 
• Dube (2013) Comment
Dube (2013) Comment on Causality
Dube Comment (2013), Evidence for Reverse 
Causality
Problems with Estimating Debt Threshold 
Identified by the Literature 
• Endogeneity 
• Most papers use a PSTR model based on either Hansen (1999) or Hansen and 
Caner (2005), however these rely on an exogenous threshold variable. 
• Kourtellos, Stengos and Tan (2012) – “One difficulty with the above studies is 
that they ignore the problem of endogeneity in the threshold variable. This 
is important because, as Kourtellos, Stengos, and Tan (2011) argue, if the 
threshold variable is endogenous, the above approaches will yield 
inconsistent parameter estimates for the regime-specific partial effects.” 
• Heterogeneity 
• Eberhardt and Presbitero (2013) – Heterogeneity makes it difficult to 
determine whether threshold is within or across countries.
Checherita and Rother (2010) replication with RR data. They fit a quadratic curve in 
their regression, and found an inverted U-shape. Below is a loess regression for five 
year future growth and debt/GDP, which replicates their finding.
But there’s a lot of heterogeneity, with many countries showing a positive relationship 
at high levels of debt. The inverted U-shape appears to be driven by the outlier of 
Ireland. (Note, RR dataset doesn’t include Luxembourg, while C-R does. )
Loess regression, but excluding Ireland.
More Recent Lit on Debt and Growth 
confirms our finding of lack of threshold. 
• Pescatori, Sandri, and Simon (2014) - Debt and Growth: Is There a Magic 
Threshold? 
• Lof and Malinen (2014) – Does Sovereign Debt Weaken Growth? A Panel 
VAR Analysis 
• Eberhardt (2013) - Nonlinearities in the Relationship between Debt and 
Growth: Evidence from Co-Summability Testing 
• Eberhardt and Presbitero (2013) - This Time They’re Different: 
Heterogeneity and Nonlinearity in the Relationship between Debt and 
Growth 
• Egert (2013) – The 90% Public Debt Threshold: The Rise and Fall of a 
Stylized Fact 
• Bell, Johnston and Jones (2013) - Stylised fact or situated messiness? The 
diverse effects of increasing debt on national economic growth
Bank of England: 300 Years of Public Debt and Interest Rates
Results of Austerity? De Grauwe and Ji (2013) 
Austerity and GDP Growth 2011-2012 Austerity and Increases in Debt/GDP 2011-2012 
Source: Financial Times and Datastream. Note: The Greek debt ratio excludes the 
debt restructuring of end 2011 that amounted to about 30% of GDP.

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HLEG thematic workshop on "Intra-generational and Inter-generational Sustainability", Thomas Herndon

  • 1. "Lessons from the 2013 Public Debt and Growth Debate: How to Assess Economic Sustainability" Thomas Herndon, Doctoral Candidate University of Massachusetts Amherst, Department of Economics and Political Economy Research Institute 9-23-2014
  • 2. Outline • 2013 Reinhart-Rogoff/HAP Public Debt and Growth Debate • Problems Identified in literature • Problems with Causality: Debt -> Growth? • Endogeneity • Panizza and Presbitero • Problems with estimating debt thresholds • Endogeneity • Kourtellos, Stengos, Tan • Heterogeneity • Eberhardt and Presbitero
  • 3.
  • 4.
  • 5. Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
  • 6. Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
  • 7. Herndon, Ash, Pollin (2014). Cambridge Journal of Economics
  • 8. Problems with Causality • Does high debt cause slow growth, or is it reverse causality? • Early review of Literature – Panizza and Presbitero (2013) • “While many papers have found a negative correlation between debt and growth, our reading of the empirical literature is that theres is no paper that can make a strong case for a causal relationship going from debt to economic growth.” • Dube (2013) Comment
  • 9. Dube (2013) Comment on Causality
  • 10. Dube Comment (2013), Evidence for Reverse Causality
  • 11. Problems with Estimating Debt Threshold Identified by the Literature • Endogeneity • Most papers use a PSTR model based on either Hansen (1999) or Hansen and Caner (2005), however these rely on an exogenous threshold variable. • Kourtellos, Stengos and Tan (2012) – “One difficulty with the above studies is that they ignore the problem of endogeneity in the threshold variable. This is important because, as Kourtellos, Stengos, and Tan (2011) argue, if the threshold variable is endogenous, the above approaches will yield inconsistent parameter estimates for the regime-specific partial effects.” • Heterogeneity • Eberhardt and Presbitero (2013) – Heterogeneity makes it difficult to determine whether threshold is within or across countries.
  • 12. Checherita and Rother (2010) replication with RR data. They fit a quadratic curve in their regression, and found an inverted U-shape. Below is a loess regression for five year future growth and debt/GDP, which replicates their finding.
  • 13. But there’s a lot of heterogeneity, with many countries showing a positive relationship at high levels of debt. The inverted U-shape appears to be driven by the outlier of Ireland. (Note, RR dataset doesn’t include Luxembourg, while C-R does. )
  • 14. Loess regression, but excluding Ireland.
  • 15. More Recent Lit on Debt and Growth confirms our finding of lack of threshold. • Pescatori, Sandri, and Simon (2014) - Debt and Growth: Is There a Magic Threshold? • Lof and Malinen (2014) – Does Sovereign Debt Weaken Growth? A Panel VAR Analysis • Eberhardt (2013) - Nonlinearities in the Relationship between Debt and Growth: Evidence from Co-Summability Testing • Eberhardt and Presbitero (2013) - This Time They’re Different: Heterogeneity and Nonlinearity in the Relationship between Debt and Growth • Egert (2013) – The 90% Public Debt Threshold: The Rise and Fall of a Stylized Fact • Bell, Johnston and Jones (2013) - Stylised fact or situated messiness? The diverse effects of increasing debt on national economic growth
  • 16. Bank of England: 300 Years of Public Debt and Interest Rates
  • 17. Results of Austerity? De Grauwe and Ji (2013) Austerity and GDP Growth 2011-2012 Austerity and Increases in Debt/GDP 2011-2012 Source: Financial Times and Datastream. Note: The Greek debt ratio excludes the debt restructuring of end 2011 that amounted to about 30% of GDP.