Is High Private Debt More Detrimental to Growth Than High Public Debt?
IMF found that high private debt is more detrimental to growth than high public debt when
it analyses the problem the Europe was facing in their economic recovery. This paper will
try to test whether the finding works well in the U.S. through the approach of
econometrics.
In the Europe, the private debt, especially the household debt, is much higher than
sovereign debt, while the situation is totally different in the United States. Therefore, if the
effect of household debt on GDP growth is proofed to be more significant than that of
public debt, the finding will be confirmed.
Review and literature
A number of other studies have looked at the impact of external debt on economic growth
in developing economies. Most of these studies were motivated by the “debt overhang”
hypothesis—a situation where a country’s debt service burden is so heavy that a large
portion of output accrues to foreign lenders and consequently creates disincentives to
invest (Krugman, 1988, and Sachs, 1989). Imbs and Ranciere (2009) and Pattillo, Poirson,
and Ricci (2002, 2004) find a nonlinear effect of external debt on growth: that is, a
negative and significant impact on growth at high debt levels (typically, over 60 percent of
GDP), but an insignificant impact at low debt levels. In contrast, Cordella, Ricci, and
Arranz (2005) find evidence of debt overhang for intermediate debt levels, but an
insignificant debt-growth relationship at very low and very high levels of debt.
However, little research based on econometrics has focus on the comparison in the effect
