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Threshold Effects of Sovereign Debt: Evidence from the Caribbean

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  • Craigwell, Roland
  • Greenidge, Kevin
  • Thomas, Chrystal
  • Drakes, Lisa

Abstract

This paper addresses the issue of threshold effects between public debt and economic growth in the Caribbean. The main finding is that there exists a threshold debt to gross domestic product (GDP) ratio of 55–56 percent. Moreover, the debt dynamics begin changing well before this threshold is reached. Specifically, at debt levels lower than 30 percent of GDP, increases in the debt-to-GDP ratio are associated with faster economic growth. However, as debt rises beyond 30 percent, the effects on economic growth diminishes rapidly and at debt levels reaching 55–56 percent of GDP, the growth impacts switch from positive to negative. Thus, beyond this threshold, debt becomes a drag on growth.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40936.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:40936

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Keywords: Debt Problems; Debt Threshold; Panel Data; Threshold Regressions;

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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, International Monetary Fund 05/223, International Monetary Fund.
  2. Reinhart, Carmen M. & Rogoff, Kenneth S., 2010. "Growth in a Time of Debt," Scholarly Articles 11129154, Harvard University Department of Economics.
  3. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  4. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 413-30, March.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  6. Kenny, Charles & Williams, David, 2001. "What Do We Know About Economic Growth? Or, Why Don't We Know Very Much?," World Development, Elsevier, Elsevier, vol. 29(1), pages 1-22, January.
  7. Geoffrey J. Bannister & Luis-Diego Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers, International Monetary Fund 11/220, International Monetary Fund.
  8. Daniel Boamah & Winston Moore, 2009. "External Debt and Growth in the Caribbean," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 139-157, July-Dece.
  9. Williams, Martin & Daniel, Clive, 1991. "Government Activity and Economic Performance in a Small Developing Economy. ," Economia Internazionale / International Economics, Camera di Commercio di Genova, Camera di Commercio di Genova, vol. 44(2-3), pages 269-281.
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