The relationship between government debt and economic growth: a multi country study through a Credit Rating Agency perspective (1998-2018)

Abstract

This study investigates if there is fiscal space in emerging and developing market economies. We use an IS growth equation which is augmented with a non-linear debt term to estimate the turning point below which debt is positively related to growth and above which debt is negatively related to growth. We find that this turning point is on average 62.2% of sovereign debt to GDP. The implication of this is that policy makers should use such a turning point in assessing the fiscal financial sustainability of their economies. This turning point methodology should be used by policy makers to complement other existing methodologies in their fiscal sustainability assessment.