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External Debt and Growth

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  • Catherine Pattillo
  • Hélène Poirson
  • Luca Antonio Ricci

Abstract

This paper assesses the non linear impact of external debt on growth using panel data for 93 developing countries. The estimates support a non-linear, hump-shaped, relationship between debt and growth, especially when the debt burden is measured relative to GDP. For a country with average indebtedness, doubling the debt ratio reduces growth by a third to a half percentage point after controlling for endogeneity. Our findings also suggest that the average impact of debt becomes negative at about 160–170 percent of exports or 35–40 percent of GDP and the marginal impact of debt at about half of these values.

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Bibliographic Info

Article provided by Università di Perugia in its journal Review of Economics and Institutions.

Volume (Year): 2 (2011)
Issue (Month): 3 ()
Pages:

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Handle: RePEc:pia:review:v:2:y:2011:i:3:n:2

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Keywords: growth; external debt; debt relief; HIPC initiative;

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References

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  1. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link," IMF Working Papers 05/223, International Monetary Fund.
  2. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," NBER Working Papers 9908, National Bureau of Economic Research, Inc.
    • Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  3. Imbs, Jean & Ranciere, Romain, 2005. "The overhang hangover," Policy Research Working Paper Series 3673, The World Bank.
  4. Chowdhury, Abdur R., 2001. "External Debt and Growth in Developing Countries: A Sensitivity and Causal Analysis," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  6. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  7. Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
  8. Presbitero, Andrea F., 2008. "The Debt-Growth Nexus in Poor Countries: A Reassessment," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(30), pages 1-28.
  9. Orlando Rubio M. & Jair Ojeda J. & Enrique Montes U., 2003. "Deuda Externa, Inversión Y Crecimiento En Colombia, 1970-2002," BORRADORES DE ECONOMIA 002340, BANCO DE LA REPÚBLICA.
  10. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472 National Bureau of Economic Research, Inc.
  11. Tornell, Aaron & Velasco, Andes, 1992. "The Tragedy of the Commons and Economic Growth: Why Does Capital Flow from Poor to Rich Countries?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1208-31, December.
  12. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  13. Shuanglin Lin & Kim Sosin, 2001. "Foreign debt and economic growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(3), pages 635-655, November.
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