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Is There a Debt-threshold Effect on Output Growth?
Author: Mr. Alexander Chudik, Mr. Kamiar Mohaddes, M. Hashem Pesaran, and Mr. Mehdi Raissi
Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 197
Language:
English
Publication Date:
08 Sep 2015
DOI:
https://doi.org/10.5089/9781513513355.001
ISBN:
9781513513355
ISSN:
1018-5941
Pages:
59
Keywords:
WP; least squares; Panel tests of threshold effects; long-run relationships; estimation and inference; large dynamic heterogeneous panels; cross-section dependence; debt; and inflation; long-run effect; feedback effect; spillover effect; trajectory effect; effects estimator; threshold variable; growth rate; debt-inflation-growth exercise; debt trajectory effect; Threshold analysis; Production growth; Inflation; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund