IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2012-157.html
   My bibliography  Save this paper

Threshold Effects of Sovereign Debt: Evidence From the Caribbean

Author

Listed:
  • Ms. Lisa Drakes
  • Ms. Chrystol Thomas
  • Roland Craigwell
  • Kevin Greenidge

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.

Suggested Citation

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

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=26005
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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. Mr. Tito Cordella & Mr. Luca A Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link," IMF Working Papers 2005/223, International Monetary Fund.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    4. 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.
    5. 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.
    6. 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.
    7. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    8. 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.
    9. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    10. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 407-437.
    11. Jaejoon Woo & Manmohan S. Kumar, 2015. "Public Debt and Growth," Economica, London School of Economics and Political Science, vol. 82(328), pages 705-739, October.
    12. Caner, Mehmet & Grennes,Thomas & Koehler-Geib, Fritzi, 2010. "Finding the tipping point -- when sovereign debt turns bad," Policy Research Working Paper Series 5391, The World Bank.
    13. Toan Quoc Nguyen & Mr. Benedict J. Clements & Ms. Rina Bhattacharya, 2003. "External Debt, Public Investment, and Growth in Low-Income Countries," IMF Working Papers 2003/249, International Monetary Fund.
    14. Mr. Geoffrey J Bannister & Mr. Luis D Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers 2011/220, International Monetary Fund.
    15. 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.
    16. Daniel Boamah & Winston Moore, 2009. "External Debt and Growth in the Caribbean," Money Affairs, CEMLA, vol. 0(2), pages 139-157, July-Dece.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bayale, Nimonka & Tchagnao, Abdou-Fataou & Chavula, Hopestone Kayiska, 2020. "More elections, more burden? On the relationship between elections and public debt in Africa," MPRA Paper 101744, University Library of Munich, Germany.
    2. 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.
    3. Enrique R. Casares & María Guadalupe García-Salazar & Leobardo Pedro Plata Pérez & José Manuel Ramos Varela, 2023. "Deuda externa y crecimiento económico. Una calibración para México," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 18(3), pages 1-24, Julio - S.
    4. repec:idb:brikps:82321 is not listed on IDEAS
    5. Charles Amo Yartey & Mr. Machiko Narita & Mr. Shelton M Nicholls & Mr. Joel Chiedu Okwuokei, 2012. "The Challenges of Fiscal Consolidation and Debt Reduction in the Caribbean," IMF Working Papers 2012/276, International Monetary Fund.
    6. Jürgen Kaiser, 2016. "Contractual Vs. Rules-Based Approaches to Sovereign Debt Restructuring," Development, Palgrave Macmillan;Society for International Deveopment, vol. 59(1), pages 94-99, June.
    7. Nzeh, Innocent Chile, 2020. "Public Debt and Economic Growth in Nigeria: Investigating the Optimal Threshold Level," Asian Development Policy Review, Asian Economic and Social Society, vol. 8(2), pages 112-127, June.
    8. Itchoko motande Mondjeli mwa ndjokou, 2015. "Too much public expenditures, less economic growt," Economics Bulletin, AccessEcon, vol. 35(3), pages 1985-1991.
    9. Chuan Li & Joyce Wong, 2018. "Financial Development and Inclusion in the Caribbean," IMF Working Papers 2018/053, International Monetary Fund.
    10. Ryota Nakatani, 2021. "Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States," Sustainability, MDPI, vol. 13(6), pages 1-26, March.
    11. Lau, Evan & Moll de Alba, Jaime & Liew, Kim-Hing, 2022. "Debt and economic growth in Asian developing countries," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 599-612.
    12. repec:agr:journl:v:4(605):y:2015:i:4(605):p:189-198 is not listed on IDEAS
    13. Taner Turan & Halit Yanıkkaya, 2021. "External debt, growth and investment for developing countries: some evidence for the debt overhang hypothesis," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(3), pages 319-341, September.
    14. Tomás Barrio & Mariam Camarero & Cecilio Tamarit, 2019. "Testing for Periodic Integration with a Changing Mean," Computational Economics, Springer;Society for Computational Economics, vol. 54(1), pages 45-75, June.
    15. Burim Gashi, 2020. "The Impact of Public Debt on the Economic Growth in South Eastern Europe: An Empirical Panel Investigation," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 3-18.
    16. 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.
    17. Taner Turan & Halit Yanikkaya, 2019. "External Debt, Growth and Investment for Developing Countries: The Role of Government Effectiveness," Working Papers 2019-03, Gebze Technical University, Department of Economics.
    18. Shvets, Serhii, 2017. "Internal public debt and economic growth: a case study of Ukraine," MPRA Paper 103873, University Library of Munich, Germany, revised 2017.
    19. D'Andrea, Sara, 2022. "A Meta-Analysis on the Debt-Growth Relationship," MPRA Paper 114409, University Library of Munich, Germany.
    20. International Monetary Fund, 2013. "Kingdom of the Netherlands-Aruba: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2013/259, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrea F Presbitero, 2012. "Total Public Debt and Growth in Developing Countries," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 24(4), pages 606-626, September.
    2. Markus Eberhardt & Andrea Filippo Presbitero, 2013. "This Time They're Different: Heterogeneity;and Nonlinearity in the Relationship;between Debt and Growth," Mo.Fi.R. Working Papers 92, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    3. Haytham Y.M. Ewaida, 2017. "The Impact of Sovereign Debt on Growth: An Empirical Study on GIIPS versus JUUSD Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 607-633.
    4. Law, Siong Hook & Ng, Chee Hung & Kutan, Ali M. & Law, Zhi Kei, 2021. "Public debt and economic growth in developing countries: Nonlinearity and threshold analysis," Economic Modelling, Elsevier, vol. 98(C), pages 26-40.
    5. Gharyeni, Abdellatif, 2015. "Dette Extérieure, Croissance Économique et Crises dans Les Pays En Développement : Un Bref Aperçu Théorique, Historique et Statistique [External Debt, Economic Growth and Crisis in Developing Count," MPRA Paper 69244, University Library of Munich, Germany, revised 04 Feb 2106.
    6. Wamboye, Evelyn, 2012. "External debt, trade and FDI on economic growth of least developed countries," MPRA Paper 39031, University Library of Munich, Germany.
    7. 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.
    8. Mr. Geoffrey J Bannister & Mr. Luis D Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers 2011/220, International Monetary Fund.
    9. Boukhatem, Jamel & Kaabi, Malèk, 2015. "Dette publique, qualité institutionnelle et croissance économique dans les pays de la région MENA : analyse par la méthode des moments généralisés [Public debt, institutional quality and economic g," MPRA Paper 65756, University Library of Munich, Germany, revised 23 Jul 2015.
    10. Taner Turan & Halit Yanıkkaya, 2021. "External debt, growth and investment for developing countries: some evidence for the debt overhang hypothesis," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(3), pages 319-341, September.
    11. Naeem Akram, 2013. "Empirical examination of debt and growth nexus in South Asian countries," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 20(2), pages 29-52, December.
    12. Ouyang, Alice Y. & Rajan, Ramkishen S., 2014. "What determines external debt tipping points?," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 215-225.
    13. Chung‐Hua Shen & Hsing‐Hua Hsu, 2022. "The determinants of Asian banking crises—Application of the panel threshold logit model," International Review of Finance, International Review of Finance Ltd., vol. 22(1), pages 248-277, March.
    14. Ben Ltaief, Leila, 2014. "Dette publique et croissance économique : investigation empirique pour la zone euro, l’Union européenne et les pays avancés," L'Actualité Economique, Société Canadienne de Science Economique, vol. 90(2), pages 79-103, Juin.
    15. Shaukat, Mughees & Mirakhor, Abbas & Krichene, Noureddine, 2013. "Fragility Of Interest-Based Debt Financing: Is It Worth Sustaining A Regime Uncertainty?," MPRA Paper 56362, University Library of Munich, Germany.
    16. Islam, Iyanatul, & Ahmed, Ishraq. & Roy, Rathin. & Ramos, Raquel., 2012. "Macroeconomic policy advice and the Article IV consultations a development perspective," ILO Working Papers 994783713402676, International Labour Organization.
    17. Jos Mauricio Gil Le n & John William Rosso Murillo & Edgar Alonso Ramirez Hern ndez, 2019. "Public Debt and Stability in Economic Growth: Evidence for Latin America," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 137-147.
    18. Mariam Camarero & Jesús Peiró-Palomino & Cecilio Tamarit, 2017. "External imbalances and growth," Working Papers 2017/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    19. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135, Central Bank of Chile.
    20. Themba Gilbert Chirwa & Nicholas M. Odhiambo, 2020. "Public Debt and Economic Growth Nexus in the Euro Area: A Dynamic Panel ARDL Approach," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(3), pages 291-310, September.

    More about this item

    Keywords

    WP; real GDP; least squares; percentage point; Debt Problems; Debt Threshold; Panel Data; Threshold Regressions; threshold estimation technique; growth rate; GDP ratio; growth-reducing effect debt; CARICOM government; threshold debt regression; debt variable; debt level; government spending; GDP cost; threshold estimation techniques of Hansen; Threshold analysis; Fiscal stance; Caribbean;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2012/157. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.