Government Debt and Macroeconomic Activity: A PredictiveAnalysis for Advanced Economies
This paper explores the empirical relationship between government debt and futuremacroeconomic activity using data on twenty advanced economies throughout the post-war era. We use robust inference techniques to deal with the bias arising from the persis-tent nature of debt to GDP ratio as an endogenous predictor of GDP growth. Our resultsshow that statistical signiﬁcance of the coeﬃcient on the debt ratio in predictive regres-sions changes considerably with the use of robust inference techniques. For countries withrelatively low average debt ratios we ﬁnd a negative threshold eﬀect as their debt ratiosincrease toward moderate levels. For countries with chronically high debt ratios, GDPgrowth slows as relative government debt increases, but we ﬁnd no signiﬁcant thresholdeﬀect.
: Government debt, GDP growth, ﬁxed eﬀects estimator, recursive demeaning,near unit-root process, threshold, subsampling.
: C32, C51, E62.
We would like to thank William Bassett and seminar participants at the Federal Reserve Board, the U.S.Census Bureau Center for Economic Research, and 32nd Annual International Symposium on Forecasting foruseful comments. The views expressed in this paper are solely the responsibility of the authors and shouldnot be interpreted as reﬂecting the views of the Board of Governors of the Federal Reserve System, or othermembers of its staﬀ.
Corresponding author. Board of Governors of the Federal Reserve System, E-mail:firstname.lastname@example.org