Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link

By Tito Cordella, Luca A Ricci, Marta Ruiz-Arranz

December 1, 2005

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Tito Cordella, Luca A Ricci, and Marta Ruiz-Arranz. Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link, (USA: International Monetary Fund, 2005) 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

Do Highly Indebted Poor Countries (HIPCs) suffer from a debt overhang? Is debt relief going to improve their growth rates? To answer these important questions, we look at how the debt-growth relationship varies with indebtedness levels and other country characteristics in a panel of developing countries. Our findings suggest that there is a negative marginal relationship between debt and growth at intermediate levels of debt, but not at very low debt levels, below the “debt overhang” threshold, or at very high levels, above the “debt irrelevance” threshold. Countries with good policies and institutions face overhang when debt rises above 15-30 percent of GDP, but the marginal effect of debt on growth becomes irrelevant above 70-80 percent. In countries with bad policies and institutions, overhang and irrelevance thresholds seem to be lower, but we cannot rule out the possibility that debt does not matter at all.

Subject: Debt burden, Debt default, Debt relief, Debt service, External debt

Keywords: Debt overhang, Debt-growth relationship, Irrelevance threshold, Overhang threshold, WP

Publication Details

Pages:

55
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/223
Stock No:

WPIEA2005223
ISBN:

9781451862423
ISSN:

1018-5941

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