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Threshold Effects of Sovereign Debt; Evidence From the Caribbean


  • Lisa Drakes
  • Chrystol Thomas
  • Roland Craigwell
  • Kevin Greenidge


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.

Suggested Citation

  • Lisa Drakes & Chrystol Thomas & Roland Craigwell & Kevin Greenidge, 2012. "Threshold Effects of Sovereign Debt; Evidence From the Caribbean," IMF Working Papers 12/157, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/157

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    References listed on IDEAS

    1. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    2. Kenny, Charles & Williams, David, 2001. "What Do We Know About Economic Growth? Or, Why Don't We Know Very Much?," World Development, Elsevier, vol. 29(1), pages 1-22, January.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    5. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-430, March.
    6. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    7. Tito Cordella & Luca A Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link," IMF Working Papers 05/223, International Monetary Fund.
    8. Geoffrey J Bannister & Luis D Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers 11/220, International Monetary Fund.
    9. Williams, Martin & Daniel, Clive, 1991. "Government Activity and Economic Performance in a Small Developing Economy. ," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 44(2-3), pages 269-281.
    10. Daniel Boamah & Winston Moore, 2009. "External Debt and Growth in the Caribbean," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 139-157, July-Dece.
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    Cited by:

    1. Charles Amo Yartey & Machiko Narita & Garth Peron Nicholls & Joel Chiedu Okwuokei, 2012. "The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean," IMF Working Papers 12/276, International Monetary Fund.
    2. Itchoko motande Mondjeli mwa ndjokou, 2015. "Too much public expenditures, less economic growt," Economics Bulletin, AccessEcon, vol. 35(3), pages 1985-1991.
    3. Sakshi Khanna & Amit Srivastava & Yajulu Medury, 2016. "A study of capital structure dynamics on the value of Indian firms using panel threshold regression model," International Journal of Management Practice, Inderscience Enterprises Ltd, vol. 9(1), pages 40-55.
    4. International Monetary Fund, 2013. "Kingdom of the Netherlands-Aruba; Selected Issues and Statistical Appendix," IMF Staff Country Reports 13/259, International Monetary Fund.
    5. repec:agr:journl:v:4(605):y:2015:i:4(605):p:189-198 is not listed on IDEAS
    6. Walid BENAYED & Foued Badr GABSI & Samia OMRANE BELGUITH, 2015. "Threshold Effect of Public Debt on Domestic Investment: Evidence from Selected African Countries," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(605), W), pages 189-198, Winter.
    7. repec:idb:brikps:82321 is not listed on IDEAS
    8. repec:pal:develp:v:59:y:2016:i:1:d:10.1057_s41301-017-0064-2 is not listed on IDEAS

    More about this item


    Debt problems; Economic growth; Public debt; Sovereign debt; Debt Threshold; Panel Data; Threshold Regressions; external debt; real gdp;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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