Is There a Debt-threshold Effect on Output Growth?

By Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran, Mehdi Raissi

September 8, 2015

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Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran, and Mehdi Raissi. Is There a Debt-threshold Effect on Output Growth?, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965- 2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers in the long run.

Subject: Econometric analysis, Financial crises, Inflation, Prices, Production, Production growth, Public debt, Threshold analysis

Keywords: And inflation, Cross-section dependence, Debt, Debt trajectory effect, Debt-inflation-growth exercise, Effects estimator, Estimation and inference, Feedback effect, Global, Growth rate, Inflation, Large dynamic heterogeneous panels, Least squares, Long-run effect, Long-run relationships, Panel tests of threshold effects, Production growth, Spillover effect, Threshold analysis, Threshold variable, Trajectory effect, WP

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/197
Stock No:

WPIEA2015197
ISBN:

9781513513355
ISSN:

1018-5941

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