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Is There a Debt-threshold Effect on Output Growth?

Author

Listed:
  • Alexander Chudik
  • Kamiar Mohaddes
  • M. Hashem Pesaran
  • Mehdi Raissi

Abstract

This paper studies the long-run impact of public debt expansion on economic growth and investigates whether the debt-growth relation varies with the level of indebtedness. Our contribution is both theoretical and empirical. On the theoretical side, we develop tests for threshold effects in the context of dynamic heterogeneous panel data models with cross-sectionally dependent errors and illustrate, by means of Monte Carlo experiments, that they perform well in small samples. On the empirical side, using data on a sample of 40 countries (grouped into advanced and developing) over the 1965- 2010 period, we find no evidence for a universally applicable threshold effect in the relationship between public debt and economic growth, once we account for the impact of global factors and their spillover effects. Regardless of the threshold, however, we find significant negative long-run effects of public debt build-up on output growth. Provided that public debt is on a downward trajectory, a country with a high level of debt can grow just as fast as its peers in the long run.

Suggested Citation

  • Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2015. "Is There a Debt-threshold Effect on Output Growth?," IMF Working Papers 15/197, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/197
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    References listed on IDEAS

    as
    1. Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2016. "Long-Run Effects in Large Heterogeneous Panel Data Models with Cross-Sectionally Correlated Errors," Advances in Econometrics, in: Gloria GonzÁlez-Rivera & R. Carter Hill & Tae-Hwy Lee (ed.), Essays in Honor of Aman Ullah, volume 36, pages 85-135, Emerald Publishing Ltd.
    2. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    3. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    4. Eberhardt, Markus & Presbitero, Andrea F., 2015. "Public debt and growth: Heterogeneity and non-linearity," Journal of International Economics, Elsevier, vol. 97(1), pages 45-58.
    5. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
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    8. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
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    10. Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2013. "Debt, inflation and growth robust estimation of long-run effects in dynamic panel data models," Globalization Institute Working Papers 162, Federal Reserve Bank of Dallas, revised 01 Nov 2013.
    11. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
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    More about this item

    Keywords

    Debt; Economic growth; Public debt; Econometric models; Panel analysis; Panel tests of threshold effects; long-run relationships; estimation and inference; large dynamic heterogeneous panels; cross-section dependence; and inflation; variables; gdp; cd; inflation; Models with Panel Data; International Lending and Debt Problems; General; and inflation.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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