The Role of Financial Stress in Debt and Recovery

Christian ProañoChristian SchoderWilli Semmler
Written By SCEPA

POLICY NOTE

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This research contradicts the highly cited Rienhart and Rogoff study, which states that debt higher than 90% of GDP will negatively affect a country's economic growth.

Rather, the authors' prove that the presence of unstable markets is the determining factor for debt's impact on economic growth. This explains why austerity policies intended to lower debt in Europe failed. Implemented after Europe's transition to the euro, markets were already destabilized. An expanded version of this research, 'Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries,' was published in the Journal of International Money and Finance.

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