Debt Overhang or Debt Irrelevance? Revisiting the Debt-Growth Link
IMF Working Papers, December 1, 2005
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Bibliographic details
- Authors: Tito Cordella, Luca A Ricci, Marta Ruiz-Arranz
- Published: December 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451862423.001
Summary and research question
- Examines whether Highly Indebted Poor Countries (HIPCs) suffer from a debt overhang and whether debt relief will improve their growth rates.
- Analyzes how the debt-growth relationship varies with indebtedness levels and other country characteristics in a panel of developing countries.
Key findings
- 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 debt levels, above the “debt irrelevance” threshold.
- In countries with good policies and institutions:
- Overhang occurs when debt rises above 15-30 percent of GDP.
- The marginal effect of debt on growth becomes irrelevant above 70-80 percent of GDP.
- In countries with bad policies and institutions:
- Overhang and irrelevance thresholds seem to be lower.
- The authors note they cannot rule out the possibility that debt does not matter at all in such contexts.
Methods and scope
- Uses a panel of developing countries to assess variation in the debt-growth relationship by indebtedness level and country characteristics.