Government Debt-to-GDP Ratio, Investment Growth and Employment Growth, and Their Response to High Nominal GDP Growth Regimes

Abstract

How do the debt-to-GDP ratio, investment growth and employment growth respond to high nominal GDP (NGDP) growth regimes? We find that positive NGDP growth shocks in the high growth regimes result in differing degrees of decline in the debt-to-GDP ratio and increases in investment growth and employment growth. The difference between the responses in the high and low NGDP growth regimes can be as high as a 3 percentage point decline in the debt-to-GDP ratio. The policy implication of the results in this chapter is that NGDP growth rates above 10 per cent are not only conducive for high investment growth and employment growth but result in a persistent pronounced decline in the debt-to-GDP ratio. Thus, policymakers must make a concerted effort to implement policies that increase NGDP growth.