









































Abstract: The recent economics literature has focused on establishing a general debt-to-GDP threshold 
across countries where output growth becomes negatively affected.  This paper, conversely, attempts to 
establish debt-to-GDP thresholds for individual countries, the purpose of which is to show that a country’s 
fiscal policy decisions should be based on data specific to that country, which should foster more informed 
and prudent policy making. 

Aisthesis      Volume 8,  201726

The Debt-to-GDP Threshold Effect On Output: A Country-
Specific Analysis

by Luke Lechtenberg

Introduction 
 In the aftermath of the 2008 financial crisis, 
economists began conducting a postmortem, asking 
questions such as: how did this happen, how could it 
have been prevented, and how can we recover from it 
as quickly as possible?  This paper is concerned with 
the lattermost question, but even more specifically, 
the question of what effect the level of public debt 
has on GDP growth.  Reinhart and Rogoff (2010), 
in their paper “Growth in a Time of Debt,” were the 
first to broach this question following 2008.  They 
asserted that when a country’s public debt reaches 
a 90 percent debt-to-GDP threshold, GDP growth 
slows.  Their findings had far reaching consequences 
and prompted many Eurozone governments, such 
as France, Austria, Germany, Italy, Greece, and the 
United Kingdom, to enact budget austerity measures 
in an effort to avoid the 90 percent threshold.  
 This paper reviews some of the theoretical and 
empirical economics literature on this topic, and 
unlike Reinhart and Rogoff (2010), who establish a 
general debt threshold for all countries, this paper 
establishes debt thresholds for individual countries 
through threshold regression analysis and supports 
the theory proposed by Chudik et al. (2015) that debt 
trajectory, not the level of debt, is what affects GDP 
growth.  Ultimately, the threshold found by Reinhart 
and Rogoff will be rejected as a basis for government 
fiscal policy decisions, as it is based on general data 
when country-specific data is needed.

Review of the Literature 
 During recessions, governments go into debt to 
finance spending that boosts aggregate demand and 
output in the short run, averting the disasters of a 
potentially deeper and longer recession (Mankiw 
& Elmendorf, 1999).  In the short run, wages and 
prices are sticky so increases in aggregate demand—
achieved through increases in government 
expenditure—boost national income.  The downside 
of public debt is manifest in the long run where 
classical economic assumptions hold and wages and 
prices are no longer sticky.  A decrease in government 
savings (i.e., an increase in government debt) is 
assumed to not be matched by an equal increase in 
private savings, which in turn drives up demand for 
money in the loanable funds market, thereby raising 
the interest rate (Mankiw & Elmendorf, 1999; Gale 
& Orszag, 2003).  A higher interest rate ultimately 
results in a decrease in investment and a subsequent 
decrease in capital stock, which lowers the marginal 
product of labor and thereby lowers wages and 
income (Mankiw & Elmendorf, 1999).  
 “Growth in a Time of Debt” by Reinhart and 
Rogoff (hereinafter R & R) addresses the negative 
impacts of government debt that are evident in the 
long run (R & R, 2010).  R & R (2010) believe that 
there is a debt-to-GDP threshold where GDP growth 
is sharply and negatively affected, and they purport 
that threshold to be 90 percent.  To find this threshold, 
R & R (2010) studied twenty advanced economies 
over the period 1946-2009 and exogenously imposed 



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  201727

four levels of thresholds in order to group countries 
according to their levels of debt.  The four thresholds 
were 1) below 30 percent, 2) between 30 and 60 
percent, 3) between 60 and 90 percent, and 4) above 
90 percent.  The countries with debt-to-GDP levels 
in excess of 90 percent had median growth rates 
about 1 percent lower than countries at the other 
threshold levels.  This simple statistical analysis led R 
& R (2010) to believe that once countries reach a 90 
percent debt-to-GDP ratio, their economic growth 
is severely impacted.  Their paper provided the 
rationale for subsequent austerity measures initiated 
throughout the Eurozone, as countries such as Great 
Britain and Greece made drastic cuts in government 
expenditures to avoid the 90 percent threshold.  
 Many papers were published in response to R & 
R’s, either supporting, questioning, or rejecting their 
conclusions.  Fortunately, Panizza and Presbitero 
published a survey of the “recent literature on the 
links between public debt and economic growth in 
advanced economies” (i.e., papers that addressed R 
& R’s findings, either directly or indirectly) (Panizza 
& Presbitero, 2012, p. 1).  The main conclusion 
that Panizza and Presbitero found throughout 
the literature is embodied in this statement by the 
International Monetary Fund: “There is no simple 
relationship between debt and growth . . . There 
are many factors that matter for a country’s growth 
and debt performance.  Moreover, there is no single 
threshold for debt ratios that can delineate the 
‘bad’ from the ‘good’” (Panizza & Presbitero, 2012, 
p. 1).  In other words, R & R oversimplified the 
relationship between debt and GDP growth, and it 
is not possible to apply a single, general threshold 
to individual countries.  The critical problem in 
R & R’s oversimplification is their exogenously 
imposed thresholds.  An ideal model would establish 
thresholds endogenously, which would provide a 
more accurate measure of how public debt affects 
GDP growth.  
 Minea and Parent (2012) delve deeper into 
R & R’s contention that a universally applicable 
90 percent debt-to-GDP threshold exists across 
developed countries, and argue that, in fact, no such 
universally applicable threshold exists.  Minea and 
Parent (2012) use cutting edge econometrics, a Panel 
Smooth Threshold Regression model, and find that, 
on average, countries with debt levels between 90 and 

115 percent grow slower than those with lower debt 
levels.  However, countries with debt levels in excess 
of 115 percent actually exhibit a positive relationship 
between debt and growth (Minea & Parent, 2012).  
The authors emphasize that this is not an excuse for 
countries to run profligate fiscal policies; rather, it 
simply illustrates that the relationship between debt 
and growth is subject to complex nonlinearities, and 
therefore making policy decisions according to a 
universal threshold is unwarranted.  Indeed, Panizza 
and Presbitero agree, saying that “the conventional 
interpretation of the presence of a debt threshold, 
which is generally used to argue that if a country 
raises its public debt-to-GDP ratio above 90 percent, 
GDP growth will decline” is a “fallacy” (Panizza & 
Presbitero, 2012, p. 18).
 Égert (2015) critiques Reinhart and Rogoff by 
using their data to replicate their study, and then 
proceeds to point out the weaknesses and underlying 
assumptions in the conclusions they draw.  At 
first, Égert (2015) conducts a simple comparison 
by graphing debt and GDP on a scatter plot.  The 
plots do not reveal any relationship between debt 
and growth, even when GDP is lagged and non-
overlapping averages of growth and debt in 10 year 
intervals are used (Égert, 2015).  Égert then moves 
to an econometric test of R & R’s results, imposing 
the same thresholds that R & R used in their study 
(<30%, 30%–60%, 60%–90%, and >90%) (Égert, 
2015).  But, just like Panizza and Presbitero (2012), 
he finds these imposed thresholds to be very 
arbitrary, unreliable, and undesirable, which leads 
him to construct a threshold regression model 
that determines thresholds endogenously (Égert, 
2015).  His model finds relatively weak connections 
between debt and growth, and in fact the relationship 
becomes weaker as debt levels rise.  In addition, his 
model finds thresholds that are much lower than 90 
percent—60 percentage points lower in fact, with 
a negative relationship evident at the 30 percent 
debt-to-GDP level in advanced economies (Égert, 
2015).  In all, the fact that this study found a much 
weaker relationship between debt and growth casts 
significant doubts on the existence of a universal 90 
percent threshold as purported by R & R.   
 Chudik et al. (2015) advance the most compelling 
hypothesis about the effects of debt levels on GDP 
growth.  They argue that the complexity of the 



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  201728

relationship between debt and growth makes any 
attempt to establish a one-way, causal, non-linear 
effect between the two difficult, and any claim that 
does attempt to establish such a relationship is 
unconvincing.  Instead, the authors contend that 
the trajectory of public debt is what has significant 
negative long-run effects on growth.  Foundational 
to their argument is the observation that “cross-
country experience shows that some economies have 
run into debt difficulties and experienced subdued 
growth at relatively low debt levels, while others 
have been able to sustain high levels of indebtedness 
for prolonged periods and grow strongly without 
experiencing debt distress,” which leads us to 
conclude that the effect of debt on growth varies from 
country to country (Chudik et al., 2015, p. 4).  While 
not criticizing R & R directly, Chudik et al. point out 
problems with their study, namely that their results 
are based on “strong homogeneity assumptions” and 
have also ignored reverse causal effects from GDP 
growth to debt (Chudik et al., 2015, p. 4).  
 One of the more pertinent findings by Chudik et 
al. (2015) is that short-run deficits are acceptable, and 
in the long run market and consumer expectations 
are what matter.  This parallels the conventional 
wisdom that a temporary increase in government 
expenditures during recessions is necessary to 
avoid hysteresis, or the “echo” of the recession into 
the future, which negatively impacts growth even 
after the recession is over.  Indeed, if the debt-to-
GDP ratio is raised temporarily to “help smooth out 
business cycle fluctuations,” Chudik et al. find no 
long-run negative impact on growth (Chudik et al., 
2015, p. 6).  
      
Method 
 I perform a threshold regression according to the 
following equation, for each country individually: 

∆y = (α0 + α1n + α2π + α3yt-1) i(d ≥ γ) + (β0 + β1n 
+β2π + β3yt-1) i(d < γ) + et

The threshold variable, d, is debt-to-GDP ratio, 
the dependent variable, ∆y, is annual real GDP 
growth per capita, and gamma, γ, is the endogenous 
threshold parameter.  The independent variables are 
population (n), inflation (π) based on CPI, and GDP 
growth lagged one period (yt-1).  The annual data is 

from Reinhart and Rogoff ’s (2010) data set used in 
their paper “Growth in a Time of Debt.”  Observations 
for each variable extend as far back as 1861, resulting 
in more than one hundred observations for each 
country, even when gaps in the data are accounted 
for.  The countries analyzed are Australia (annual 
observations from 1862-2008), Canada (1871-2008), 
Chile (1862-2008), France (1862-2008), Germany 
(1862-2008), Greece (1914-2008), Italy (1862-2008), 
New Zealand (1871-2008), the United Kingdom 
(1862-2008), and the United States (1871-2008).  
These countries were used because many of them 
enacted budget austerity measures, as mentioned in 
the introduction, and because they are the world’s 
leading economies, so enough data is available on 
each country to populate the model.  

Preview of Results
 Within the sample, statistically significant 
thresholds were found for France, Greece, Italy, 
the United Kingdom, and the United States.  The 
regression results for these countries are included 
below, as well as two graphs of each country’s debt 
levels over time; one graphs debt over the past 
century and a half, while the other graphs debt over 
the past three decades.  The purpose of including the 
graphs is to investigate Chudik et al.’s (2015) claim 
that debt trajectory matters when establishing a 
statistically significant debt threshold. 
 Statistically significant thresholds were not 
found for Australia, Canada, Chile, Germany, and 
New Zealand.  Therefore, their regression results 
are not included.  Graphs of debt over time, exactly 
like the ones listed in the preceding paragraph, are 
included to support the other side of Chudik et al.’s 
claim.  To explain, if Chudik et al.’s findings hold, 
then countries without significant debt thresholds 
should have debt levels that are either falling or 
low.  For clarity, the results are broken up into two 
sections, Results A and Results B.  The countries with 
significant debt thresholds are in Results A, while the 
others are in Results B.  A discussion of the results 
follows each section, which is then followed by a 
discussion of both sections together along with a 
brief policy discussion.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  201729

Results A
France

Greece

Figure 1.1. France.

Figure 1.2. Debt/GDP of France, 1980-2010.

Figure 1.3. Debt/GDP of France, 1880-2006.

Figure 2.1. Greece.

Figure 2.2. Debt/GDP of Greece, 1980-2010.

Figure 2.3. Debt/GDP of Greece, 1861-2008.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  201730

Italy United Kingdom

Figure 3.1. Italy.

Figure 3.3. Debt/GDP of Italy, 1861-2008.

Figure 3.2. Debt/GDP of Italy, 1980-2010.

Figure 4.1. United Kingdom.

Figure 4.2. Debt/GDP of the United Kingdom, 1980-
2010.

Figure 4.3. Debt/GDP of the United Kingdom, 1861-
2008.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  201731

United States Discussion of Results A
 For France, the model found a threshold at a 
debt-to-GDP ratio of 80 percent (Figure 1.1).  The 
coefficient for debt is significant at the 99 percent 
confidence interval.  What is interesting, however, 
is that debt is actually positively associated with 
growth.  France is the only country in this sample that 
the model assigns a positive debt coefficient.  This is 
certainly unexpected, but should be interpreted as 
Minea & Parent (2012) interpreted their unexpected 
results: countries should not take what the model 
returns as infallible, and therefore France should not 
run profligate fiscal policies. 
 For Greece, the United Kingdom, and the United 
Sates, the model found debt thresholds significant at 
99 percent confidence, but unlike France, debt was 
negatively associated with GDP growth.  The highest 
thresholds for the three countries were 103, 156, 
and 63 percent for Greece, the U.K., and the U.S., 
respectively (Figure 2.1, 4.1, and 5.1).  The model 
returned three threshold levels for each country, 
and for Greece and the United States, the second 
threshold level was also statistically significant, 
but only Greece’s second threshold was negatively 
associated with GDP growth; this means that debt 
becomes negatively associated with GDP growth for 
Greece at a threshold of 65 percent.  Additionally, 
Italy’s debt-to-GDP threshold was established at 47 
percent at 90 percent confidence (Figure 3.1).
 These results closely mirror the hypothesis of 
Chudik et al.  Reviewing the graphs of debt for all 
five countries, their debt levels consistently and 
steadily increase for at least several decades prior 
to 2010, with the United Kingdom being the only 
exception (Figure 1.2, 1.3, 2.2, 2.3, 3.2, 3.3, 5.2 and 
5.3).  That said, the United Kingdom’s debt does 
increase steadily all throughout the previous decade, 
with a dramatic spike occurring in 2008 (Figure 4.2 
and 4.3).  These results give strong credence to the 
hypothesis advanced by Chudik et al. (2015) that 
debt trajectory matters in establishing a statistically 
significant debt threshold.

Figure 5.1. United States.

Figure 5.2. Debt/GDP of the United States, 1980-2010.

Figure 5.3. Debt/GDP of the United States, 1861-2005.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  2017

Results B
Australia

Canada

Chile

32

Figure 6.1. Debt/GDP of Australia, 1980-2010.

Figure 6.2. Debt/GDP of Australia, 1861-2008.

Figure 7.1. Debt/GDP of Canada, 1980-2008.

Figure 7.2. Debt/GDP of Canada, 1867-2007.

Figure 8.1. Debt/GDP of Chile, 1980-2010.

Figure 8.2. Debt/GDP of Chile, 1861-2008.

Germany

Figure 9.1. Debt/GDP of Germany, 1980-2010.

Figure 9.2. Debt/GDP of Germany, 1880-2006.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  2017

New Zealand

Discussion of Results B
 Because no statistically significant debt thresholds 
were found for these countries, their regression 
results were not included.  However, the graphs that 
track debt levels are pertinent to addressing Chudik 
et al.’s (2015) findings and therefore were included.  
Australia, Canada, Chile and New Zealand all have 
either falling levels of debt or have maintained low 
levels of debt for the past century and a half (Figure 
6.1, 6.2, 7.1, 7.2, 8.1, 8.2, 10.1, and 10.2).  The only 
exception is Germany, as debt levels for Germany 
are steadily increasing over time (Figure 9.1 and 9.2).  
There are several reasons why this could be: first, the 
data on Germany’s public debt levels is very sparse, 
and there are several large gaps within the last one 
hundred and fifty years where no debt-to-GDP ratio 
is given.  The model probably did not have enough 
observations to establish a significant threshold.  
Second, while Germany’s debt level is increasing, it 
is still relatively low compared to the other countries 
in this sample.  Indeed, countries in Section A had 
to reach a debt-to-GDP ratio of at least 60 percent 

before a significant threshold was determined, and 
Germany has yet to reach a 50 percent debt-to-GDP 
threshold. 
 In contrast to the countries in section A, the 
countries in section B did not have statistically 
significant debt thresholds.  However, these results 
still strongly support the findings of Chudik et al.  
Indeed, according to Chudik et al. (2015), we would 
expect that debt in countries with low or falling levels 
of debt would not affect GDP growth negatively, and 
this is exactly what the model finds to be the case 
for Australia, Canada, Chile, New Zealand, and 
Germany.

Discussion of Results A and B and Policy 
Implications
 These results differ from most of the current 
literature because they are generated for individual 
countries, based on data specific to that country.  This 
is critical because the austerity measures adopted by 
Eurozone countries in response to the 2008 crisis and 
R & R’s paper did not consider country-specific data, 
and as a result, budget cuts were implemented in 
haste which probably had negative economic effects.  
That is, conventional economic theory as outlined 
by Douglas and Mankiw (1999) says that increases 
in government expenditures can help mitigate the 
damages of a recession.  The exact opposite of this, 
budget cuts, has contractionary effects, which is 
highly counterproductive during a recession.
 No statistically significant thresholds were 
found for countries with low levels of debt or falling 
levels of debt, which is in lockstep with Chudik et 
al.’s (2015) findings.  Furthermore, countries with 
rising levels of debt for at least the previous decade 
had statistically significant debt-to-GDP thresholds, 
where GDP growth becomes adversely affected.  It 
is therefore very important for future governments, 
when contemplating whether to implement austerity 
measures, to consider whether their debt is on a 
downward trajectory or has yet to reach detrimental 
levels.  If either of these conditions hold, then 
austerity measures are unwarranted.  If debt is on 
an upward trajectory or has reached a high debt-to-
GDP level, panic is ill-advised and the most prudent 
course of action is to lower debt levels gradually, 
restoring the confidence of markets, consumers, 
and foreign governments in the country’s central 
government.

33

Figure 10.1. Debt/GDP of New Zealand, 1980-2010.

Figure 10.2. Debt/GDP of New Zealand, 1861-2005.



The Debt-to-GDP Threshold Effect On Output: A Country-Specific Analysis

Aisthesis      Volume 8,  2017

 Governments must consider the monetary 
environment when borrowing to pay for government 
expenditures.  The 2008 financial crisis presented an 
economic situation that we had never seen before: the 
Federal Reserve made prolonged efforts to remain at 
the zero lower bound (ZLB), keeping interest rates 
at zero from 2009 to the end of 2015.  At the ZLB, 
government spending multipliers are greater than 
in “normal” times (Delong & Summers, 2012).  This 
is because demand in the loanable funds market is 
very slack, so an increase in government spending 
does not cause a rise in interest rates and therefore 
the crowding out effect is avoided.  Therefore, if there 
ever is a time to borrow and increase government 
spending, it is at the zero lower bound, where 
government expenditures have the greatest potential 
to affect economic output positively.

References
Chudik, A., Mohaddes, K., Pesaran, M. H., & 

Raissi, M. (2015). Is there a debt-threshold effect 
on output growth? The Review of Economics and 
Statistics, 99(1), 135-150.

 
Delong, B., & Summers, L. (2012). Fiscal policy in 

a depressed economy.  Brookings Papers on 
Economic Activity, 1, 233-297. 

Égert, B. (2015). Public debt, economic growth 
and nonlinear effects: Myth or reality?  Journal 
of Macroeconomics, 43, 226-238. doi:10.1016/j.
jmacro.2014.11.006

Elmendorf, D., & Mankiw, N. G. (1999). Government 
debt.  Handbook of Macroeconomics,  1, 1615-
1669. 

Gale, W. G., & Orszag, P. R. (2003). Economic effects 
of sustained budget deficits. National Tax 
Journal, 56(3), 463-485. 

Minea, A., & Parent, A. (2012). Is high public debt 
always harmful to economic growth? Reinhart 
and Rogoff and some complex nonlinearities. 
CERDI, 2012.18.

Panizza, U., & Presbitero, A. (2012). Public debt 
and economic growth in advanced economies: 
A survey.  Swiss Journal of Economics and 
Statistics, 149(2), 175-204.

Reinhart, C. M., & Rogoff, K. S. (2010). Growth in 
a time of debt. American Economic Review, 
100(2), 573-78.

34


