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Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link

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Author Info

  • Tito Cordella
  • Luca Antonio Ricci
  • Marta Ruiz-Arranz

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/223.

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Length: 55
Date of creation: 01 Dec 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/223

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Related research

Keywords: Economic growth; Debt relief; Heavily indebted poor countries; debt; debt overhang; external debt; public debt; debt service; debt servicing; low debt; indebted countries; debt crisis; highly indebted countries; creditors; debt threshold; debt reduction; private debt; net present value of debt; stock of debt; debt stock; debt cancellation; debt stocks; debt accumulation; bilateral debt; repayments; debt rescheduling; debt problems; loans; taxes; debt obligations; foreign debt; external finance; debtor reporting; market debt; commercial debt; debt crises; excessive debt; commercial creditors; debt forgiveness; debt relief initiative; debt burden; debt-relief; debt flows; ratio of debt; private external debt; public debt crises; sustainability of debt; debt ratios; credit rationing; obligations; total debt stocks; multilateral creditors; debtor reporting system; public and publicly guaranteed loans; principal repayments; payments; total external debt; debtor country; bilateral creditors; interest; debt relief initiatives; debt explosions; debt servicing costs; imf purchases; repayment; debt thresholds; fiscal policy; public and publicly guaranteed; international lending; bilateral donors; debt ratio; debt service to exports;

References

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  10. Arslanalp, Serkan & Henry, Peter B., 2003. "Debt Relief: What Do the Markets Think?," Research Papers 1810, Stanford University, Graduate School of Business.
  11. Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
  12. Kaminsky, Graciela L. & Pereira, Alfredo, 1996. "The debt crisis: lessons of the 1980s for the 1990s," Journal of Development Economics, Elsevier, vol. 50(1), pages 1-24, June.
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