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The Debt-Growth Nexus: a Dynamic Panel Data Estimation

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  • Andrea F. PRESBITERO

Abstract

This paper investigates the relationship between external debt and economic growth in developing countries. Notwithstanding a general agreement on theory, empirical evidence is not conclusive and lacks of robustness. This contribution aims to shed more light on the relationship between external debt and economic growth and to draw some policy implication for debt relief. This work highlights the critical role of econometric and methodological issues. The results for a panel of 69 developing countries over the period 1977-2002 support a negative linear relationship between external debt and economic growth, and between debt service and investment. These effects seem to be stronger in the Low-Income Countries than in the overall sample, raising concern about the dramatic effect that debt has on economic performance in the world's poorest countries. Eventually, external debt impairs economic growth through the liquidity constraint, the creation of macroeconomic instability, a reduced total factor productivity, and its effect on macroeconomic policies and institutional development.

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Bibliographic Info

Article provided by SIE - Societa' Italiana degli Economisti (I) in its journal Rivista Italiana degli Economisti.

Volume (Year): 11 (2006)
Issue (Month): 3 (December)
Pages: 417-462

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Handle: RePEc:rie:review:v:11:y:2006:i:3:n:4

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

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References

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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Hélène Poirson & Luca Antonio Ricci & Catherine A. Pattillo, 2002. "External Debt and Growth," IMF Working Papers 02/69, International Monetary Fund.
  3. Steve Bond & Asli Leblebicioglu & Fabio Schiantarelli, 2010. "Capital accumulation and growth: a new look at the empirical evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(7), pages 1073-1099, November/.
  4. Easterly, William & Loayza, Norman & Montiel, Peter, 1997. "Has Latin America's post-reform growth been disappointing?," Policy Research Working Paper Series 1708, The World Bank.
  5. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April.
  6. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  7. Anke E. Hoeffler, 2000. "The Augmented Solow Model and the African Growth Debate," CID Working Papers 36, Center for International Development at Harvard University.
  8. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
  9. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
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Citations

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Cited by:
  1. Andrea F. Presbitero, 2009. "Debt-Relief Effectiveness and Institution-Building," Development Policy Review, Overseas Development Institute, vol. 27(5), pages 529-559, 09.
  2. Francesco Aiello & Valeria Pupo, 2009. "Structural Funds And Economic Divide In Italy," Working Papers 200914, Università della Calabria, Dipartimento di Scienze Economiche, Statistiche e Finanziarie (Ex Dipartimento di Economia e Statistica).
  3. Presbitero, Andrea F., 2007. "The debt-growth nexus in poor countries: a reassessment," Economics Discussion Papers 2007-17, Kiel Institute for the World Economy.
  4. Moore, Winston & Thomas, Chrystol, 2008. "A Meta-Analysis of the Relationship between Debt and Growth," MPRA Paper 21474, University Library of Munich, Germany.
  5. Aiello, Francesco & Pupo, Valeria, 2012. "Structural funds and the economic divide in Italy," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 403-418.
  6. António Afonso & Sebastian Hauptmeier, 2009. "Public Debt and Economic Growth: a Granger Causality Panel Data Approach," Working Papers 2009/24, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
  7. Cordella, Tito & Missaley, Alessandro, 2011. "To give or to forgive ? aid versus debt relief," Policy Research Working Paper Series 5859, The World Bank.
  8. Pupo Valeria & Aiello Francesco, 2009. "L'impatto della politica regionale dell'Unione Europea. Uno studio sulle regioni italiane," Rivista italiana degli economisti, Società editrice il Mulino, issue 3, pages 421-454.
  9. Qayyum, Unbreen & Musleh ud, Din & Haider, Adnan, 2012. "Foreign Aid, External Debt and Governance," MPRA Paper 40260, University Library of Munich, Germany.
  10. Hwang, Jen-Te & Chung, Chien-Ping & Wang, Chieh-Hsuan, 2010. "Debt Overhang, Financial Sector Development And Economic Growth," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 51(1), pages 13-30, June.

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