Negative growth and high debt: A survival analysis approach

Public sector debt has been associated with low, or even negative, growth. This position is most closely associated with Reinhart and Rogoff 's paper "Growth in a time of debt" in which they suggest that high levels of public debt would reduce the growth rate of real gross domestic product (GDP) per capita. In this paper, I approach this question from a different perspective. I use survival analysis to analyze the duration of economic crises and the relationship to episodes of high public debt-to-GDP ratios. I equate an economic crisis to a protracted fall in real output per capita, what I call a “negative growth episode” or, simply, a depression. Instead of investigating the relationship of debt and the yearly change in the GDP growth rate (or average of five year yearly data), I focus on the length of negative growth periods across different countries. The data came from the Penn World Table and IMF's Historical Public Debt Database. Empirical methodology includes non-parametric, semi-parametric, and parametric survival analysis. All the regressions depict consistent results that high debt is positively correlated with long duration of negative growth episodes – countries with high debt ratios seem to be those for which it is harder to get out of a depression. Even though different regressions have specific advantages and disadvantages, statistical comparisons reveal that a log-normal parametric model yields the best result among all the parametric analysis. In general, I find that high debt is positively correlated with the duration of depressions. Inflation is negatively correlated with such duration. To add more robust checks, I add 20 different covariates, one at a time, into the original log-normal regression model. My main results were not refuted even by adding more covariates into the model including economic factors, political factors, cultural factors and financial crises as controls.