This paper uses cross country regression analysis on a large set of countries to consider two hypotheses. The first is that increased public debt as a percentage of the economy reduces confidence in financial institutions. The second is that increased public debt relative to the economy lowers economic expectations. If it is true that increased public debt reduces expectations or diminishes confidence in financial institutions, then it will lower investment. As a consequence, not only will there be lower present aggregate demand resulting in lower current economic output and employment as a result of higher public debt, but there will also be lower future economic growth. The findings of the paper are consistent with both hypotheses.
ISSN: 2241-0996 (Online)