IN SEARCH OF AN OPTIMAL DEBT RATIO FOR ECONOMIC-GROWTH

This paper extends the work of Barro (1979), Eisner (1992), Joines (19 91), Sawhney and DiPietro (1994), and others and examines whether an o ptimal debt ratio exists that will maximize economic growth. The growt h rate of real GDP is specified as a function of the debt ratio, the d ebt ratio squared, the growth rates of labor labor employment, capital services, money stock, and a trend variable. The sample ranges from 1 960 to 1991. Hypothesis tests show that economic growth and its determ inants, including the debt ratio are cointegrated and have a long-run stable relationship. Results also indicate that the optimal debt ratio is 38.4 percent for debt held by the public and 48.9 percent for tota l debt. Thus, the current (1993) debt ratios of 50.9 percent for the d ebt held by the public and 68.2 percent for total debt ave far greater than the desirable levels.