Cluster Analysis on Government Debt to Economic Growth

The impact of increasing government debt on growth depends highly on its function and objective. Debt may improve welfare and enhance growth by stimulating consumption; however, an irresponsible increase in debt level may also destroy the foundation of an economy. Currently, most of the empirical literatures have proposed the existence of a nonlinear relationship between debt and economic growth: moreover, an extremely high level of debt to GDP ratio is suggested to be an undesirable factor for long-term development. This research applies clustering methods to investigate the link between government debt-to-GDP ratio and growth of real GDP per capita in 34 OECD countries over the period from 2000 to 2014. Different sorts of groups are categorized by Cluster Analysis. The empirical results reveal the negative relation between the government debt to GDP ratio and the economic growth in OECD countries: more specifically, three out of four groups categorized by clustering methods hold the negative relation while the impact of the remaining group is neutral. The research suggests that the increase in government bonds may not be a good way to stimulate the economy in developed countries: this implication conform with many recent researches on government debt.