This paper investigates the relationship between external indebtedness and economic growth, with a particular attention to LICs, for which the theoretical arguments of debt overhang and liquidity constraint have to be reconsidered. The estimation of a growth model, with a panel of 121 developing countries, supports a negative and linear relationship between past values of the NPV of external public debt and current economic growth. This is due to the “extended debt overhang”, according to which a large indebtedness leads to misallocation of capital and discourage long-term investment and structural reforms. This work underlines the critical role of economic policies and institutions, the necessity of focusing on LICs and fostering macroeconomic stability.
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Find related papers by JEL classification: C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data F34 - International Economics - - International Finance - - - International Lending and Debt Problems H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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