Abbas, S. Ali, Nazim Belhocine, Asmaa ElGanainy, and Mark Horton, 2010, “A Historical Public Debt Database,” Working Paper 10/245 (Washington, International Monetary Fund).
Aiyagari, S. Rao, and Ellen R. McGrattan, 1998, “The Optimum Quantity of Debt,” Journal of Monetary Economics, Vol. 42 (3), pp. 447–469.
Arellano, M., and S. Bond, 1991, “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,” Review of Economic Studies, Vol. 58, pp. 277–297.
Arellano, M., and O. Bover, 1995, “Another Look at the Instrumental Variables Estimation of Error Components Models,” Journal of Econometrics, Vol. 68, pp. 29–51.
Caner, Mehmet, Thomas Grennes, and Fritzi Koehler-Geib, 2010, “Finding the Tipping Point-When Sovereign Debt Turns Bad,” World Bank Policy Research Working Paper No. 5391, World Bank, Washington DC.
Di Bella, Gabriel, 2008, “A Stochastic Framework for Public Debt Sustainability Analysis,” Working Paper 08/58 (Washington, International Monetary Fund).
Everaert, Greetje, 2008, “Kenya: Selected Issues Paper”, IMF Country Report No. 08/337 (Washington: International Monetary Fund).
Floden, Martin, 2001, “The Effectiveness of Government Debt and Transfers as Insurance,” Journal of Monetary Economics 48 (2001) pp. 81–108.
International Monetary Fund, 2003, “Public Debt in Emerging Markets, Is it too high?” World Economic Outlook, September 2003, Chapter 3, World Economic and Financial Surveys (Washington).
International Monetary Fund, 2008, “Fiscal Policy as a Countercyclical Tool,” World Economic Outlook, October 2008, Chapter 5, World Economic and Financial Surveys (Washington).
International Monetary Fund, 2009, “From Recession to Recovery: How soon and how strong?” World Economic Outlook, April 2009, Chapter 3, World Economic and Financial Surveys (Washington).
Kumar, Manmohan S., and Jaejoon Woo, 2010, “Public Debt and Growth,” Working Paper 10/174 (Washington, International Monetary Fund).
Ostry, Jonathan D. Atish R. Ghosh, Jun I Kim, and Mahvash S. Qureshi, 2010, “Fiscal Space.” IMF Staff Position Note 10/11 (Washington: International Monetary Fund).
Reinhart, Carmen M., Kenneth S. Rogoff, and Miguel A. Savastano, 2003. “Debt Intolerance,” Brookings Papers on Economic Activity, I:2003 (Washington: Brookings Institution).
Reinhart, Carmen M., and Kenneth S. Rogoff, 2009, This Time is Different; Eight Centuries of Financial Folly, Princeton University Press.
Reinhart, Carmen M., and Kenneth S. Rogoff, 2010, “Growth in a Time of Debt,” prepared for the American Economic Review Papers and Proceedings.
Roodman, David, 2006, “How to do xtabond2: An Introduction to “Difference” and “System” GMM in Stata,” Working Paper No. 103, Center for Global Development, Washington.
Saint-Paul, Gilles, 2005, “Fiscal Policy and Economic Growth: the Role of Financial Intermediation,” Review of International Economics, 13(3), pp. 612-629.
Shin, Yongseok, 2006, “Ramsey Meets Bewley: Optimal Government Financing with Incomplete Markets,” Department of Economics, University of Wisconsin.
Topalova, Petia, and Dan Nyberg, 2009, “What Level of Public Debt Could India Target?” Working Paper 10/7 (Washington: International Monetary Fund).
Weh-Sol, Moon, 2010, “Korea’s Optimal Public Debt Ratio,” SERI Quarterly, April 2010, Samsung Economic Research Institute, Seoul.
The authors are grateful for comments from Marco Piñon, Rodrigo Valdez, Miguel Savastano, Alejandro Santos, participants at a Western Hemisphere Department seminar at the IMF, and participants at the X Central American Regional Conference in Managua, Nicaragua, July 28-29, 2011. The authors also thank Raphael Espinoza for generously sharing his STATA codes and advice.
The rating grades each country on a scale from 0 (least creditworthy) to 100 (most creditworthy), and covers over 166 countries from the mid 1980s forward.
They also run a panel estimation with qualitatively similar results. Inflation and default have a negative effect on credit ratings (IIR) and not being in Club A also has a negative effect.
A regional dummy for CAPDR, interacting with debt, had a small positive and significant coefficient, which could be picking up the consistent improvement in debt tolerance in the region over the sample period.
Period dummies instead of a time trend were also used with no effect on the estimations. The dummies were not significant in the GMM estimation. Similarly, a variable for Revenues/GDP was used to proxy debt repayment capacity but also turned out to be not significant. Finally external debt was used instead of total debt, but the coefficient, although significant, was very small (0.02).
For the first period we assume that IIRt−1 = IIRt−2 in order to maintain the smoothness of the debt intolerance curve.
An additional way to verify countries in the intermediate range would be to examine the rating outlooks for the ratings of countries on the border between investment and non-investment grade.
One way of adjusting for this would be to convert the debt into a market equivalent nominal amount that would yield the same NPV as current debt at market interest rates.