An empirical study of the effects of public and private debt on growth of advanced economies

The debt fuelled global financial and European sovereign debt crises of the past decade, have raised important questions over the sustainability of global debt levels. A rapidly expanding field of empirical literature has sought to address these questions, particularly in regards to the effects on economic growth. The research, however, has been incomplete in its analysis of the effects public and private debt may jointly have on growth. Therefore, the main contribution of this thesis is to provide a comprehensive analysis on the full effects that may be present. This is done via the use of a dynamic panel framework, which is constructed to account for the short-run growth and long-run level effects that both forms of debt may have on growth. Further, our novel approach is to employ non-parametric Gaussian process regressions, to estimate the relationship between debt and growth, without applying any structure to the response. The first main result of this analysis would suggest that the relationship between public debt and growth is markedly non-linear and consistent with the seminal findings of Reinhart and Rogoff (2010) among others, who argue there is a distinct reduction in growth when public debt rises above 90 percent of GDP. The second main finding of this thesis would present evidence to suggest that in the long run, the effects of public debt may be no different to the effects of private debt on growth. Hence, suggesting that all debt may be the same in the long run