The recent fi nancial crisis and recession has left a legacy of historically high
and rising level of public indebtedness across the advanced economies.
The central policy debate across Europe, Japan, and the United States now
centers on how fast to stabilize soaring public debt/GDP ratios, given that post-crisis
growth remains fragile. We bring evidence to bear on the issue by identifying the
major public debt overhang episodes in advanced economies since the early 1800s.
Following Reinhart and Rogoff (2010), we select stretches where gross public debt
exceeds 90 percent of nominal GDP on a sustained basis. Such public debt overhang
episodes are associated with lower growth than during other periods. Even more
striking, among the 26 episodes we identify, 20 lasted more than a decade. The long
duration belies the view that the correlation is caused mainly by debt buildups during
business cycle recessions. The long duration also implies that the cumulative shortfall
in output from debt overhang is potentially massive. These growth-reducing effects of
high public debt are apparently not transmitted exclusively through high real interest
rates, in that in eleven of the episodes, interest rates are not materially higher.