Public Debt and Real GDP: Revisiting the Impact

By Constance de Soyres, Reina Kawai, Mengxue Wang

April 29, 2022

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Constance de Soyres, Reina Kawai, and Mengxue Wang. Public Debt and Real GDP: Revisiting the Impact, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper provides new empirical evidence of the impact of an unanticipated change in public debt on real GDP. Using public debt forecast errors, we identify exogenous changes in public debt to assess the impact of a change in the debt to GDP ratio on real GDP. By analyzing data on gross public debt for 178 countries over 1995-2020, we find that the impact of an unanticipated increase in public debt on the real GDP level is generally negative and varies depending on other fundamental characteristics. Specifically, an unanticipated increase in the public debt to GDP ratio hurts real GDP level for countries that have (i) a high initial debt level or (ii) a rising debt trajectory over the five preceding years. On the contrary, an unanticipated increase in public debt boosts real GDP for countries that have (iii) a low-income level or (iv) completed the HIPC debt relief initiative.

Subject: Asset and liability management, Debt relief, External debt, Public debt

Keywords: Debt relief, Evolution of public debt, GDP ratio, Global, Growth, IMF predictions, Level classification, Public debt shock, Public debt trajectory, Sovereign Debt

Publication Details

Pages:

55
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/076
Stock No:

WPIEA2022076
ISBN:

9798400207082
ISSN:

1018-5941

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