Unbundled debt and economic growth in developed and developing economies: an empirical analysis

We unbundle the effect of debt on economic growth using a new panel dataset sourced from Vague (2014) for 48 countries over the period 1961 to 2015. We distinguish between public, private, household, and non-financial corporation debt. We use the PVAR approach, Granger Causality Tests, and Impulse Response to establish causality. We also test the heterogeneity in the debt growth relationship across developed and developing countries. In our full sample of countries all types of debt appear to be harmful for economic growth. The negative effect of public debt appears to be uniform across developed and developing countries, although the impact is much stronger on developed countries. Household debt appears to be expansionary in developing countries whereas contractionary in developed countries. Non-financial corporation debt appears to have no impact on developing countries but negative impact on developed countries. Finally, total debt (i.e. the sum of public, household and non-financial corporation debt) has a negative impact on growth in developed countries but no impact is detected in the case of developing countries.