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The Debt-Ratio Distraction

While a high public debt/GDP ratio can hamper a country’s growth prospects, the ratio itself is not the determining factor. The impact of debt on GDP growth depends on a country's economic volatility, its balance-sheet structure, and the likelihood that an adverse shock will cause borrowing costs and contingent liabilities to soar.

BEIJING – A 2010 paper by Kenneth Rogoff and Carmen Reinhart suggesting that a country’s economy will slow when public debt exceeds 90% of GDP has fueled heated debate worldwide. What is usually missing from such discussions, however, is an explanation of how too much debt leads to slower growth. Such an explanation is needed to decide whether crossing a particular threshold really is the determining factor in an economic slowdown.

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