Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link

55 Pages Posted: 4 Jan 2006

See all articles by Tito Cordella

Tito Cordella

World Bank

Luca A. Ricci

International Monetary Fund (IMF) - Research Department

Marta Ruiz-Arranz

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

Abstract

Do Highly Indebted Poor Countries (HIPCs) suffer from a debt overhang? Is debt relief going to improve their growth rates? To answer these important questions, we look at how the debt-growth relationship varies with indebtedness levels and other country characteristics in a panel of developing countries. Our findings suggest that there is a negative marginal relationship between debt and growth at intermediate levels of debt, but not at very low debt levels, below the debt overhang threshold, or at very high levels, above the debt irrelevance threshold. Countries with good policies and institutions face overhang when debt rises above 15-30 percent of GDP, but the marginal effect of debt on growth becomes irrelevant above 70-80 percent. In countries with bad policies and institutions, overhang and irrelevance thresholds seem to be lower, but we cannot rule out the possibility that debt does not matter at all.

Keywords: Debt, Growth, Debt Overhang, Debt Irrelevance, HIPCs

JEL Classification: F34, O40, C23

Suggested Citation

Cordella, Tito and Ricci, Luca Antonio and Ruiz-Arranz, Marta, Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link (December 2005). IMF Working Paper No. 05/223, Available at SSRN: https://ssrn.com/abstract=873622

Tito Cordella (Contact Author)

World Bank ( email )

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Luca Antonio Ricci

International Monetary Fund (IMF) - Research Department ( email )

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202-623-6007 (Phone)
202-623-4072 (Fax)

Marta Ruiz-Arranz

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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