Friday, August 13, 2010

Debt and Growth

Is there a relationship between debt and growth? If so, what is it? If not, why worry about the level of debt that we or any other countries are accumulating?

To get an answer, we need to look at the impact of both external and internal debt on U.S. growth. And here are a couple of items that address those issues to varying extents.

In the first one, economists at the Federal Reserve Bank of St. Louis, while not looking directly at foreign debt, do look at the correlation of growth rates of major trading partners to the U.S. It shows that our rate of growth has varying correlations with that of some of our trading partners. That means that to varying degrees, their growth affects ours. But is there anything that indicates debt affects growth?

That question takes us to the second item. In a more complex piece on the VoxEU website, economists Carmen Reinhart and Kenneth Rogoff looked at growth rates and debt levels in a number of countries. Their results show that there may be reasons for concern if debt levels get too high. Essentially, very high levels of debt may slow growth. Given the interdependence of a globalized economy, this may explain why many economists are thinking that paring government debt may be helpful in the long run.

I don't think these articles are directly useful for the classroom, but I do think they can provide you with insights to integrate into your discussions and lectures. I welcome your thoughts.

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