Finding the tipping point -- when sovereign debt turns bad
AbstractPublic debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 5391.
Date of creation: 01 Jul 2010
Date of revision:
External Debt; Economic Theory&Research; Debt Markets; Emerging Markets; Public Sector Economics;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-06 (All new papers)
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